Inflation-The US Debt Ceiling-The FedSooooo...where are we now and what does all this mean?
In previous posts, I talked about the implications of inflation and debt financing by Government and in particular the US.
So what's new?
1.....in addition to aproximately .5 trillion added to the debt ceiling in October, the Denate has voted to inrease the debt ceiling by an additional 2.5 trillion to pay the bills until early 2023 (ie after the next mid terms). To put this number into perspective, the US takes in about 4 trillion in tax revenue and so this additional room provides for spending an additional 60% of unfunded government spending.
2...The Fed announced today that is increasing the speed of its taper which in plain english means that as of March of next year it will have stopped its current policy of buying US Government deficits. In addition, after March it anticpates that it will start raising interest rates.
When you put 1 and 2 together it means that the US Government will be going to the bond market to raise about 2 trillion dollars to fund itself. From past experience, this is a lot of money and the question will be what the market interest rate reaction will be irrespective of whatever The Fed does with its benchmark interest rates which primarly affect only short term interest rates.
The most likely outcome will be a steepening of the yield curve which affects corporate borrowing and mortgage rates - in plain english people will likely face much higher mortgage rates sometime towards the end of next year.
So what was the market reaction?
Celebration
Why?
Because there some uncertainty removed as what the Fed was planning to do and this combined with massive stimulus spending by the US is good news.
Or is it?
Great question. If you read my previous posts on the inflation subject you probably already know the answer to this question. The answer is nope. All of these actions are setting the table for future inflation spiral and debt crisis. None of which is a good thing for stock prices.
Another way of looking at it is to ask yourself the question. "If the economy is in such great shape, why do we need all this stimulus?" Historically, governments run big deficits in times of poor economic growth and reduce deficits or sometimes actually run a surplus in good times. This isn't happening now.
So what is a good indicator of how much stimulus we have seen?
The Fed balance sheet is a good measure. At the height of the financial crisis in 2008/09 in March of 2009 to be exact before the market turned around, the Fed Balance sheet stood at approximately 2 trillion. As of last month this figure has risen to 8.66 trillion!!! That is a lot of mulah pumped into the economy.
So what's the bottom line?
As I advised before - BE CAREFUL. This is manipulation on a scale that has never been seen before in history.
When the dam breaks it is not going to be pretty and there be massive destruction of asset values.