McAlvany Recap • Nov 06 2023
Debt Matters
MPM Posted on November 6, 2023

Advocates of Modern Monetary Theory, like their Marxist brethren, are fond of saying that debt doesn’t matter. “We owe it to ourselves,” they say, which is a double entendre that offers a one-two punch for their argument—both “we deserve it” and “the debt ‘we’ create is owed to us.”

But debt always matters. The only time it doesn’t matter to a debtor is when it doesn’t have to be paid back—at which point it definitely matters to the lender. And as long as it has to be paid back, it certainly matters to the debtor.

In short, debt is a very big thing. So, is it a very bad thing?

Well, when increasing levels of debt require higher levels of taxation, when increasing levels of inflation require higher payments for almost everything, and when decreasing wages are caused by millions of illegal immigrants ballooning the labor pool, life can get very hard—especially for the poor, whom MMT theorists supposedly care about.

The first two elements in that list are direct consequences of creating too much money via debt, and the last is the way politicians hope to stay in office after people discover the con (by creating voters from people who have received extensive handouts).

For the McAlvany analysts, debt is very much in focus this week—in the form of bonds. Depending on when in the week their communication was produced, bond sales were either in the tank or in the pink. It’s been a roller coaster, and that’s hard on investor confidence. And confidence is obviously what keeps the confidence bubble inflated. Is it about to burst?

Key Takeaways:

  • The bond market’s end game
  • The big squeeze is the big story
  • Did Yellen commit the biggest error ever?
  • All roads lead to Rome, and this Rome is paved with gold

The McAlvany Weekly Commentary: David’s voluminous reading offers his hearers some amazing benefits. Often he is able to distill the thoughts and work of many analysts, along with data from many sources, and offer a coherent and pertinent summary. In addition this week, he offers translation services in regard to a scholarly paper by a former MWC guest, Charles Calomiris. “In Calomiris’s new paper, the topic is fiscal dominance, which sounds dreadfully boring until you realize that it’s the technical jargon used to describe the end game—the end game in the bond market.” That sounds serious, and it is. Calomiris wrote Fragile by Design, which David and he discussed in their interview. High-level thinkers often say very important things, but it’s not always easy to understand what they’re saying. This week, you can find the work of one high-level thinker made clear by another one.

Credit Bubble Bulletin: A firm belief that the Fed has paused or ceased its interest rate hikes caused a massive move lower in bond yields this week. The result was, in Bloomberg’s terms, the “best run for bonds since 2020.” But things didn’t stop there. “The S&P500 jumped 5.9%, the largest weekly gain in a year.” Many key indexes shot up even farther. “It was a huge short squeeze week.” Doug parses the data, its analysis, and the Fed’s current noises. Investors are laser-focused on Powell’s every pronouncement, trying to discern where monetary policy is going, and, in consequence, how markets will react. “The big squeeze coming out of the bank bailout and the resulting loosening of financial conditions (negating Fed tightening) is the key 2023 storyline.” Will it determine conditions going forward? Read CBB for Doug’s take on this and much more.

Hard Asset Insights: Morgan spent some time this week giving context to a comment by Stan Druckenmiller to the effect that Janet Yellen had made “the biggest blunder in the history of the Treasury.” That “blunder” was to have not issued more long-term debt when rates were historically low in the post-Covid era. Perhaps, muses Morgan, Yellen saw that the Treasury was already cornered. Perhaps “term[ing]-out most of the debt would have caused systemic losses for the only remaining buyers of that debt—price sensitive hedge funds and households.” He describes the challenge facing the Treasury, and then notes that the market is waking up to the situation, and that consequently, “the confidence bubble (the ultimate bubble) is increasingly in jeopardy.”

Golden Rule Radio: Miles and Tory take a look at inflation’s unwillingness to take a hint from the Fed and go down. Instead, it remains high, is going higher, and is making people’s lives tougher. The hosts begin by taking a look at government spending, featuring a chart showing it higher by far than in 2008 or during the Covid response. They then discuss the downward wage pressure being exerted by 10 million illegal entries into the country during Biden’s presidency alone, the obstacles to the Fed’s raising interest rates further in the next three to 15 months, and the cautionary tale of what happened to the BoJ when it tried to support Japanese bonds and cratered the yen. Gold’s response to all of the above has been as expected, but Miles takes the analysis further and tells where the signs indicate gold is likely to go in the short term.

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