RIP: Fiscal Responsibility

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Republicans and Democrats have stowed their axes, sunk their differences… and agreed to raise the debt ceiling.

The government will remain in funds for the next two years — beyond the 2020 election, not coincidentally.

The Wall Street Journal reads the truce terms:

Congressional and White House negotiators reached a deal to increase federal spending and raise the government’s borrowing limit, securing a bipartisan compromise to avoid a looming fiscal crisis and pushing the next budget debate past the 2020 election.

The deal for more than $2.7 trillion in spending over two years… would suspend the debt ceiling until the end of July 2021. It also raises spending by nearly $50 billion next fiscal year above current levels.

Failing a deal, the Capitol lights would have winked out Oct. 1. And the federal government would have slammed its door on the noses of the American people.

Chaos and Old Night would have descended upon these shores…

A Rain of Horrors

The ranger at Glacier National Park would have been thrown into idleness…

The Federal Theatre Project would have been thrown into darkness…

And the bright-eyed sixth-grader from Duluth would have been thrown from the Smithsonian.

The last government shutdown (December 2018–January 2019), stretched 35 impossible days.

How we endured those black, unlit times… we cannot recall.

Yet our representatives at Washington have spared the grateful nation a sequel.

Absent a deal…

They would have been required to hatchet spending $120 billion flat, all around.

The arrangement instead raises spending caps some $50 billion this year… and another $54 billion the next.

Both Sides Claim Victory

The president declared the deal “a real compromise in order to give another big victory to our Great Military and Vets!”

With straight faces Nancy Pelosi and Chuck Schumer announced:

With this agreement, we strive to avoid another government shutdown, which is so harmful to meeting the needs of the American people and honoring the work of our public employees.

Democratic Sen. Patrick Leahy gushed the agreement will “stave off economic catastrophe.”

It will furthermore reverse “unsustainable cuts in nondefense discretionary spending.”

Just so.

The Real Meaning of Bipartisanship

The late Joe Sobran labeled Democrats “the evil party.” Republicans were “the stupid party.”

Thus he concluded that “bipartisanship” yields outcomes both evil and stupid.

Perhaps Sobran hooked into something…

Under the deal Republicans get their guns. Democrats get their butter.

And the taxpayer gets the bill.

He pays now through higher taxes — or later through higher interest payments on the debt.

But pay he will.

And so fiscal responsibility lies dead beyond all hope of recall.


We expect Democrats to spent grandly and gorgeously.

Since FDR it has read the identical electoral blueprint.

But Republicans traditionally existed for two purposes: to lower taxes — and to square the books.

You wished to spend money you did not have? And throw open the Treasury to the public?

“No!” was the answer you could expect.

Like a sour old schoolmarm with steel in her eye and a rattan in her hand… they might not have been popular.

But you knew where they were. And you could trust them with the checkbook.

But these Republicans are no more.

They have gone the route of fedoras, monocles and spats.

What Happened to the Old-time Religion?

They turned away from their old-time fiscal religion, made their peace with Big Government… and got elected.

They labelled the old religion “root canal economics.”

Republicans instead sat at the feet of Mr. Arthur Laffer, with his famous curve.

They could spend like Democrats without touching the taxpayer.

Deficits do not matter in the new catechism.

Only a few Republican holdouts remain… to keep the tablets.

Reports the Journal:

Fiscal hawks panned reports of the proposed deal Monday before many of the details had been released, warning it could add trillions of dollars more to projected government debt levels over the next decade. 

But they sob in vain…

Drowning in Debt

United States public debt excels $22.4 trillion… and swells by the day, by the month, by the year.

Federal debt presently rises three times the rate of revenue coming in.

To simply maintain current debt levels, CBO estimates Congress would have to increase revenues 11% each year… while simultaneously hatcheting the budget 10%.

Will Congress spend 10% less each year?

We have just received our answer.

For the long-term consequences we turn to the Brookings Institute:

Sustained federal deficits and rising federal debt, used to finance consumption or transfer payments, will crowd out future investment; reduce prospects for economic growth; make it more difficult to conduct routine policy, address major new priorities, or deal with the next recession or emergencies; and impose substantial burdens on future generations.

Deficits to the Horizon

Meantime, the present economic expansion is officially the longest on record.

Can the economy peg along another decade without a recession? Or even half so long?

We already detect smoke rising from the engine, and oil leaking out below.

Trillion-dollar deficits are already in sight.

In the certain event of recession, authorities will flood the economy with money borrowed from the future — deficit spending.

Deficits could double… or possibly triple.

What a Surprise

The only surprise about this debt ceiling deal?

That anyone could be surprised by this debt ceiling deal.

Republicans and Democrats might stage a splendid combat for the crowd. They batten upon each other with savage and vicious blows.

Mr. Trump’s gladiatorial presence makes the show grand beyond comparison.

But watch closer…

The combatants do not strike at the vitals. And the blood is fake.

When it comes to borrowing and spending… Republicans and Democrats are as united as any lovers could hope to be.

Threaten to cut them off.

Then watch the warfare immediately halt… and the hands of peace come extending from both sides.

This we have just witnessed. The debt ceiling is raised.

And so today we drop a mournful tear on the ashes of fiscal responsibility.

As we have noted before, Republicans once defended the approaches to the United States Treasury.

But they have since sold the pass.

And both parties have sold us all down a river…


Brian Maher
Managing editor, The Daily Reckoning

The post RIP: Fiscal Responsibility appeared first on Daily Reckoning.

Today’s “Huge” Jobs Report Is a Bad Omen

This post Today’s “Huge” Jobs Report Is a Bad Omen appeared first on Daily Reckoning.

Markets paced the floor this morning… like a man condemned awaiting word on his final appeal.

For the December unemployment report was due out at 8:30.

A poor jobs report would send stocks spiraling down the greasy pole — again.

The market staggered into 2019 off its worst December since the Great Depression. It is also off to its worst start in 19 years.

Could it absorb another blow?

Economists as a whole forecast 176,000 jobs.

What number did the report actually reveal?

312,000 jobs — a “blowout” number — and the largest monthly increase since last February.

We were also informed that American wages increased a gorgeous 3.2% over the previous December.

Only once since April 2009 has this 3.2% year-over-year increase been equaled.

And the sweet scarlet treat atop the sundae:

The unemployment level increased from 3.7%… to 3.9%.

Come again, you say?

How in the name of all things holy is higher unemployment good news?

For this reason:

It means more Americans are entering the labor force.

If they cannot secure immediate positions, they are counted among the unemployed… and the unemployment rate increases.

In December, 419,000 previously idle Americans volunteered for duty.

And the labor force participation rate increased to 63.1% — up from November’s 62.9%.

Wall Street went and had itself a day at the races…

The Dow Jones stormed back 747 points today.

The S&P surged 84.

The Nasdaq leaped 275 points — a thumping 4% rally.

(The unemployment report alone does not account for today’s raucous numbers. Answer below).

From the cheering section rose exultant gloats and howls today…

“The far-bigger-than-expected 312,000 jump in nonfarm payrolls in December would seem to make a mockery of market fears of an impending recession,” beamed Paul Ashworth, chief U.S. economist at Capital Economics.

“What recession?” mocked Stu Hoffman of PNC Financial.

Jared Bernstein — former chief economist for Joe Biden — says it “looks like the jobs market didn’t get the recession memo.”

Just so.

But let us dispatch a recession memo of our own…

As we have illustrated before, an unemployment rate below 4% is no cause to celebrate.

The proof is clear as gin… and every bit as stiff:

Recession is never far behind when unemployment sinks below 4%.

U.S. unemployment dipped beneath 4% last May.

Unemployment previously slipped beneath 4% in April 2000 — at the peak of the dot-com derangement.

The economy was in recession by March 2001 — less than one year later.

A similar schedule would put this April on recession watch.

Before 2000, unemployment had previously fallen below 4% in December 1969.

The economy was sunk in recession shortly thereafter.

Do we stretch the facts to fit into a theory?

We do not.

Nicole Smith is chief economist at Georgetown University’s Center on Education and the Workforce.

From whom:

If we look historically at other times when the unemployment rate has fallen below 4%… what we find is that the low unemployment rate is often associated with a boom phase just before a recession. It’s almost a precursor for a recession or a precursor for another slumping economy.

Perhaps you are unconvinced.

We therefore hammer you upon the head with the following evidence — a chart giving the history since 1950.

On each occasion the unemployment rate fell below 4%, it reveals, recession was on tap:


Of course… recessions are not always occasioned by unemployment rates below 4%.

But once again, the chart proves it beyond all cavil:

When the official unemployment rate sinks beneath 4%… recession is close by.

In pleasant reminder, unemployment presently hovers at 3.9%.

But why should recession rapidly follow peak employment?

Mainstream economics equates extremely low (official) unemployment with an “overheating” economy.

Central banks must therefore raise interest rates to lower the temperature, to bring the business under control.

Our own central bank has been following the operator’s manual.

But instead of slowing things down… the clods end up slamming the engine into reverse.

As the following chart informs us, rising interest rates preceded each U.S. recession since 1950:


Confirms analyst Jesse Colombo:

Economic recessions, financial crises and bear markets have occurred after virtually all Fed rate hike cycles, and there is no reason to believe that the current one will be an exception.

Which brings us now to Mr. Jerome Hayden Powell, chairman of the Federal Reserve System…

He appears to be a man with a bit between his teeth.

He has seemed determined, that is, to increase interest rates at any excuse.

Last month, for example — as the stock market was plunging into correction, no less — he went ahead anyway.

Many analysts believed the continued stock market horrors would back him off.

But will today’s go-go jobs report encourage him to press ahead?

MarketWatch on Powell’s dilemma:

On the one hand, the markets are reflecting fears of a deceleration in activity, but more fundamental sources of information on the economy show the danger of an overheating economy remain present.

“This will be very difficult for Powell to reconcile,” warns Carl Tannenbaum, chief economist at Northern Trust.

But what does the man himself have to say?

Powell addressed the American Economic Association this morning.

His comments suggest a new flexibility

He said he is “prepared to adjust policy quickly and flexibly.”

What about the balance sheet?

We contend that quantitative tightening (QT) has throttled markets far more than a series of pinprick rate hikes.

Last month Powell said QT was running “on autopilot,” a remark that sent stocks careening.

Not today.

The chairman said this morning the Fed is “listening carefully” to markets.

He further pledged to announce a halt “if needed,” adding, “We wouldn’t hesitate to change it.”

By sheerest coincidence… the Dow Jones jumped 400 points following the remarks.

We can only come to one conclusion:

The Federal Reserve will never truly “normalize” its balance sheet — despite all gabble to the contrary.

Wall Street will simply not allow it.

But it will not be enough to keep the show going.

We stand by our 2019 forecast:

Dow 18,000 by year’s end.

And recession — just look at the unemployment rate.


Brian Maher
Managing editor, The Daily Reckoning

The post Today’s “Huge” Jobs Report Is a Bad Omen appeared first on Daily Reckoning.

The “True” Money Supply Is Plunging

This post The “True” Money Supply Is Plunging appeared first on Daily Reckoning.

The battered bulls sprung from the mat this morning, dukes up and fighting mad.

All three major averages rallied hard in early trading.

But late morning the bears landed another clout… and the bulls were back on the canvas, taking the count.

The Dow Jones ended the day down another 220 points.

The S&P lost 30; the Nasdaq, 195.

We now have it on excellent authority — Deutsche Bank — that 2018 is the “worst year on record.”

The bank tracks some 70 asset classes. These include global stocks, bonds, commodities, currencies, real estate — everything, A through Z.

And 93% of these assets are negative on the year… eclipsing the 84% mark set in 1920.

Here is your graphic proof:

2018: The Worst Year Ever

For perspective on the profound difference one year can make, consider:

Only 1% of these asset classes yielded negative returns last year — 1%.

And this year… 93%.

Might central banks somehow account for the Jekyll and Hyde act?

Do not forget, the Federal Reserve commenced quantitative tightening (QT) last October.

Foreign central banks are likewise tightening the taps, though to a lesser extent.

Deutsche Bank:

This is what happens when the vast majority of global assets are expensive historically due to extreme monetary policy… It’s perhaps not a surprise that in this time major… central banks have moved from peak global QE to widespread QT.

As a Daily Reckoning reader, you are likely chockablock with knowledge of quantitative tightening.

But let us now direct your attention toward monetary analysis of which few are aware.

That is, let us consider the “true money supply,” or TMS.

Economists of the “Austrian School” crafted the metric in the 1970s and ’80s.

Existing measures of money supply gave false readings, they claimed.

The true money supply consists of cash, demand deposits (i.e., checking accounts) at banks, savings… and government deposits at the Federal Reserve.

That is, it consists of money immediately available for transaction. It excludes money market funds, for example.

As Austrian economist Frank Shostak explained in Strategic Intelligence:

We take the figures published by the Federal Reserve and remove some items that shouldn’t be there and add some items that should. For instance… they include money market funds. (A money market fund is an investment in income-paying securities. It’s not really money in the sense that money sitting in your checking account is.) What we’re doing is removing all the transactions of lending and credit, and we only add those items that are pure money, which are claim transactions, like demand deposits.

This TMS business is complicated… and we refer you to Professor Google if its inner wizardry interests you.

But here our tale acquires its point…

If the TMS is a reliable weather vane of monetary conditions… the breeze is dying.

As analyst Jeff Peshut at the financial blog said earlier this year:

“It’s easy to see that the growth of TMS could grind to a halt and even begin to contract later this year.”

It appears that moment has come.

Here, the variable winds of the “true money supply” since 2003:

The 'True Money Supply' Is Plunging

Note the red arrow to the right.

Does it not align with the arrow on the left… that preceded the 2008 financial crisis?

Economist Joseph Salerno helped develop the TMS.

Says he:

What is of great interest is that the recent deceleration of monetary growth (the second red arrow) almost exactly matches in extent and rapidity the monetary deceleration (the first red arrow) that immediately preceded the financial crisis of 2007–08.

But perhaps Salerno chases a shadow, a phantom, a chance correlation trussed up as evidence.

No, he insists. He stands on solid bedrock, his eyes glued only to fact:

The qualitative relationship between TMS growth, credit crisis and recession has been remarkably clear since 1978.

He hauls forth the following chart in evidence:

Credit Crisis or Recession?

Let the record show:

Recession or credit crisis followed previous occasions when the true money supply decelerated at the present clip.

Not to the month, day or hour, of course.

But economies run to a lagging schedule.

Does the foregoing mean recession — or credit crisis — will soon be upon us?

The top-right line in the chart suggests a recession starting in March.

We take any economic forecast with truckloads of table salt — as should you.

But given its record, this true money supply rates a serious consideration.

This Wednesday Jerome Powell said quantitative tightening will proceed apace — on “autopilot” no less.

He further believes monetary policy is presently approaching “neutral.”

But if the true money supply is a reliable indicator, it is already in violent reverse…

And the economy is speeding for a brick wall.

Meantime, a government shutdown is looming for midnight tonight in the absence of a budget deal. Trump has threatened “a shutdown that will last for a very long time” if denied funding for the border wall.


Brian Maher
Managing editor, The Daily Reckoning

The post The “True” Money Supply Is Plunging appeared first on Daily Reckoning.