Well, the San Francisco 49ers are playing the Cleveland Browns today with the Browns missing injured RB Nick Chubb and QB Deshaun Watson, replacing them with QB Dorian Thompson-Robinson (aka, Do Not Resuscitate or DNR) and RB Jerome “Exploding Pinto” Ford. ESPN gives the Browns a 26% chance of winning. I am amazed it is that high!
But back to economic news!
Gold is soaring due to the instability in the Middle East (Iran/Hamas/Hezbollah attacks on Israel). Let’s see if Israel continues it assault on Gaza or not.
Janet Yellen, Biden’s Treasury apparatchik, was at the IMF/World Bank meetings in Marrakesh (yes, former students are expecting me to like Crosby, Stills and Nash “Marrakesh Express” but I detest CS&N). Instead, here is Them with Here Comes The Night which is more fitting about risks in the global economy.
The heavy debt burdens of advanced economies — from the United States to China and Italy — was a recurrent theme in the meetings, which came after financial markets in recent weeks pushed U.S. bond yields higher. Italian central bank governor Ignazio Visco said there was an impression markets were “reevaluating the term premium” as investors become more nervous about holding longer-term debt.
JPMorgan chair of global research Joyce Chang put it another way. “The bond vigilantes are back, and the Great Moderation is over,” she told a panel of the two-decade era of relative economic calm before the 2008/09 financial crisis.
The Federal Reserve still hasn’t shrunk their massive balance sheet and removed the Covid stimulus. Call it lack of Fed retreat.
And mortgage rates continue to rise, up 174% under Stumblin’ Joe Biden despite The Fed not really shrinking their balance sheet.
I may be the only person in the US cheering for House Republicans being at an impasse over House Speaker. Why? Congress can’t approve massive spending bills with out a Speaker! Less spending, less inflation! There fixed inflation without The Fed.
First, food prices are up 20% since December 2020. Talk about destruction of middle class wealth!
That is in addition to gasoline prices are up 64% under Biden while rent growth is up 252%. Well, Biden waived through millions of illegal immigrants and rent had to rise. Biden and Washington DC’s broken borders is Livin’ La Vida Loco.
To cope with inflation (that Paul Krugman claims is over but the last inflation report showed that the tinders of inflation are hard to extinguish), consumers have turned to credit cards to survive. In fact, credit cards have expanded 38% since April 2021 despite rapidly rising interest rates. And credit card delinquency rates are rising and are now above Covid-era economic shutdown levels.
Paul Krugman, Nobel Laureate in economics and media celebrity, made a terrible claim yesterday when he pronounced that “The war on inflation is over. We won, at very little cost.” Krugman’s proclamation was trumpeted by The View’s Joy Behar Joy who claimed that everything is going great in the country! The economy is “booming” and people are having an “easier time” putting bread on the table. Huh? Easier than a month ago maybe, but not easier since 2021 under Bidenomics.
Hmm. Suppose that during World War II the Germans had stopped after they invaded and captured Paris on June 14, 1940. The war could have been over, but France was lost to Germany amidst thousands of dead and loss of property. That is not a victory, but a crushing defeat.
Just like my Paris example, Krugman’s claim the war on inflation is over and we won AT VERY LITTLE COST was grossly misleading and a big kerplunk (thud). Why? For one, the average American family is $7,400 POOR than in January 2021 when Biden became President. So, it looks like we know the cost of inflation and it was steep, not “very little cost.” Well, very little cost to elitist millionaires like Krugman.
Krugman loves the recent inflation report from the BLS. Specifically, the 12-month change in the Consumer Price Index Less Food And Energy for September was 4.1%. Krugman focuses on the recent 6-month change being less than 2%. In Krugman’s mind, this is victory … core inflation has been tamed and inflation is at The Fed’s target rate of 2%.
But before Krugman pops the champagne cap on the 1959 Dom Perignon for $42,350 (while the rest of us are drinking E&J Gallo’s Thunderbird), bear in mind that he is referring to the RATE OF GROWTH in prices, not the highly elevated levels of prices. Victory against inflation would be if prices returned to December 2020 levels.
I pointed out yesterday that “real” wages contracted 0.1% YoY (after 3 months positive) in September. It is important to note that real wage growth was negative from 2021 until 3 months ago, but has gone negative yet again. Victory??
Krugman prefers core inflation, removing food, housing and energy. You know, the three things most Americans actually care about. Take shelter (or rent of residence) where rent is growing at a sizzling 7.1% YoY.
Under Biden and Congress’ reckless spending splurges (and inane Federal energy policies), regular gasoline prices are up 64%. Growth in rent of residence has grown 252%! So, Professor Krugman, Americans are far worse off than before Biden was President.
If prices return to December 2020 (or pre-Covid levels), I will declare a victory. But for right now, symbollically, the German army is occupying France and Paris with horrible suffering for the French people. In other words, Americans are still far worse off under Biden even though inflation is finally slowing.ew
Speaking of France and World War II, maybe we should consider Joe Biden as today’s Pierre Laval, leader of Vichy France since Biden seems more concerned with pleasing Klaus Schwab and The World Economic Forum than America’s middle class and low wage worker (like Laval was concerned with that German leader Adolf Hitler thought).
Bidenomics is failing catestropically. Example? As interest rates rise to fight Biden’s Federal spending splurges, bank credit growth slowed to -0.41% YoY for the 10th straight week of negative credit growth.
While interest paid on short-term loans almost 10%!!
“Jimmy, watch me tank the economy even worse than you did!”
However, headline CPI came in modestly hot at +0.4%, with YoY at 3.7% – that is the 3rd monthly rebound in a row.
Source: Bloomberg
Core CPI rose 0.3% MoM, with YoY sliding to +4.1% YoY (as expected)… it still hasnt been below 4.00% since May 2021….
Source: Bloomberg
Food and Commodities contribution to YoY CPI slowed while Services increased…
Goods inflation dipped back to unchanged YoY and Services CPI slowed to +5.7%…
Services stands out on A MoM basis…
Under the hood, gasoline continues to rise and used car prices drop…
Rent of primary residence and owner’s equivalent rent YoY both exceeeded 7%. Fixing a car/truck rose 10.2% (will people start to notice that repairing EVs is outrageously expensive?).
The index for all items less food and energy rose 0.3 percent in September, as it did in August.
The shelter index was the largest factor in the monthly increase in the index for all items less food and energy.
The shelter index increased 0.6 percent in September, after rising 0.3 percent the previous month. The index for rent rose 0.5 percent in September, and the index for owners’ equivalent rent increased 0.6 percent over the month.
The lodging away from home index increased 3.7 percent in September, ending a string of 3 consecutive monthly decreases.
Among the other indexes that rose in September was the index for motor vehicle insurance, which increased 1.3 percent after rising 2.4 percent the preceding month.
The indexes for recreation, personal care, new vehicles, and household furnishings and operations also increased in September.
The medical care index rose 0.2 percent in September, as it did in August.
The index for hospital services increased 1.5 percent over the month, and the index for physicians’ services was unchanged.
The prescription drugs index fell 0.7 percent in September.
The index for used cars and trucks fell 2.5 percent in September, after decreasing 1.2 percent in August.
The apparel index declined 0.8 percent over the month, and the communication index was unchanged.
The index for all items less food and energy rose 4.1 percent over the past 12 months.
The shelter index increased 7.2 percent over the last year, accounting for over 70% of the total increase in all items less food and energy.
Other indexes with notable increases over the last year include motor vehicle insurance (+18.9 percent), recreation (+3.9 percent), personal care (+6.1 percent), and new vehicles (+2.5 percent).
Gasoline prices continue to rise…
Shelter costs are slowing, but accounted for the largest part of core CPI…
Rent inflation 7.41%, down from 7.76% in August and the lowest since Sept 2022
Shelter inflation 7.15%, down from 7.27% in August and the lowest since Nov 2022
Bear in mind that while CPI very stale data is rising over 7%, real-time rent indicators are in freefall. Apt List’s Sept rent drop was the biggest on record…
And perhaps most importantly, one silver lining is that The Fed’s new favorite inflation signal – Core Services CPI Ex-Shelter YoY slowed to +3.74% (despite jumping 0.46% MoM). That is the lowest YoY since Dec 2021…
Is this third straight monthly increase in CPI YoY an inflection point? Or is M2 still leading the trend?
Turning from the cost of things to the ability to pay, “real” wages contracted 0.1% YoY (after 3 months positive)…
This is not the soft-landing cruise lower in inflation that the market (and The Fed) was hoping for…
Former Fed Chair Janet Yellen, notorious for leaving rates too low for too long (TLTL) and then suddely raising them after Donald Trump was elected President, wants rates lower again for much longer. Make rates great again (MRGA?).
YELLEN SAYS DEBT SERVICE COSTS WILL BE 1% OF GDP FOR THE NEXT DECADE. – Reuters
Her statement implies that the economy will be strong and the government will run budget surpluses, or interest rates will be near zero for the next ten years.
Instead of guessing what she is pondering, we do some math and arrive at the only possible answer.
The Government Can’t Afford Today’s Interest Rates
Before walking through various scenarios to figure out what Yellen may be implying, it’s helpful to provide background on what drives her mindset. In our article The Government Can’t Afford Higher For Longer, Much Longer, we shared the following graph and commentary:
Total federal interest expenses should rise by approximately $226 billion over the next twelve months to over $1.15 trillion. For context, from the second quarter of 2010 to the end of 2021, when interest rates were near zero, the interest expense rose by $240 billion in aggregate. More stunningly, the interest expense has increased more in the last three years than in the fifty years prior.
The graph above is just the tip of the fiscal iceberg. Every month, lower-interest-rate debt matures and will be replaced with higher-cost debt.
Higher interest rates are an additional funding burden for the federal government. Janet Yellen surely understands the damaging situation and grasps that higher interest rates are not feasible given current debt levels.
Low-Interest Rates Make Debt Manageable
The government’s debt-to-GDP ratio has climbed three-fold since 1966. Yet, until very recently, the ratio of the federal interest expense to GDP was at its lowest level since 1966.
While the amount of debt rose sharply, its cost was offset by rapidly falling interest rates. As a result, higher debt levels were very manageable.
If $1 trillion of debt with a 4% coupon matures, and the Treasury replaces it with $2 trillion at a 2% coupon, the interest expense doesn’t change despite doubling the debt. While a simplified example, that is essentially what has occurred for the last 30 years.
The following graph compares the 5-year U.S. Treasury note and the implied cost of funding the government’s debt.
In time, as lower interest rate debt is replaced with higher interest rate debt, the benefits of lower rates work in reverse.
“Debt Service Costs At 1%” – Is It Possible?
We return to Janet Yellen’s message and discuss why she is likely correct.
Balanced Budgets and Unicorns
In the five years leading up to the pandemic, nominal GDP grew at 5.03% annually. Let’s optimistically assume growth continues at 5% consistently for the next ten years. Now, let’s tack on an even bolder presumption: the government balances its budget every year for the next ten years. Thus, the amount of outstanding debt will remain constant. For context, in the last 57 years, there has only been one year in which the amount of debt has not increased.
In such a far-fetched scenario, the debt-to-GDP ratio would drop considerably to 70%. However, interest costs would equal 2% of GDP. Such is much better than the current 3.36% but double Janet Yellen’s 1% objective.
Budget surpluses for the next ten years would lower interest expenses even more and possibly get the interest expense to GDP ratio to 1%. However, the odds of a unicorn spraying rainbows across the sky and the government running a surplus are the same: zero percent.
Consequently, we exclude surpluses as a viable way to reduce the interest expense to a more manageable level.
Budget Deficits And The Magic Of Low-Interest Rates
Balanced budgets or surpluses are unrealistic, given the political and fiscal trends. Further, the economy relies heavily on government spending. While fiscal prudence would be good in the long run, the short-run effect would be a recession.
Instead of using pipe dreams as scenarios, let’s get realistic. The more likely, albeit still optimistic, scenario involves the debt and GDP growing at the same rate. Let’s also assume interest rates remain at current levels. In this exercise, we assume an average borrowing cost of 4.75%, which is a little below the current weighted average funding cost for the government. Under this “realistic” picture, interest expense would climb to 5.6% of GDP.
The only logical variable in the equation that can make Janet Yellen correct is the future interest rate.
To arrive at Yellen’s 1% figure, assuming debt grows at the rate of GDP, interest rates must be much lower.
In time, a weighted average interest rate of 0.85% would put the nation’s interest expense at 1% of GDP.
When Janet Yellen tells us the debt cost to GDP ratio will be 1% over the next ten years, she is really saying interest rates will be below 1% for the next ten years.
Therefore, Janet Yellen must believe that the recent spike in inflation and yields is an anomaly. If the pre-pandemic economic and interest rate trends resume, she will be correct.
Summary
Part of Janet Yellen’s job is to exude confidence to its investors. In this case, it means telling the public that the current jump in interest expenses will not last. While she would probably prefer to be straightforward and say interest rates will be much lower, she must also be sympathetic to the Fed’s job of getting inflation down. Therefore, to walk the party line, she must speak in code, so to speak.
Whether you agree with Yellen’s projection or not, the following CBO graph projecting interest costs as a percentage of tax revenues, courtesy of Bianco Research, highlights that the government has no choice but lower for longer interest rates. The current level of interest rates will bankrupt the nation.
This makes sense. Two global elitists who look down with disdain and want to reprogram MAGA voters. Can we reprogram the MRGA types into letting rates float to market.
Now you know why the Mortgage Bankers Association, Home Builders and Realtors send a letter to Fed Chair Powell asking for rate hikes to cease. Mortgage rates are UP 165% under Biden.
But on to the demand side of mortgage finance.
Mortgage applications increased 0.6 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending October 6, 2023.
The Market Composite Index, a measure of mortgage loan application volume, increased 0.6 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index increased 1 percent compared with the previous week. The Refinance Index increased 0.3 percent from the previous week and was 9 percent lower than the same week one year ago. The seasonally adjusted Purchase Index increased 1 percent from one week earlier. The unadjusted Purchase Index increased 1 percent compared with the previous week and was19 percent lower than the same week one year ago.
Joe Biden is the Buzz Lightyear of the economy … and not in a good way. Under Biden and the Congressional spending sprees, the US debt is going to infinity … and beyond!
Twenty days.
That’s how long it took the Biden administration to add another half-trillion dollars to the national debt.
Bidenomics certainly requires a lot of borrowing and spending.
On September 15, the debt quietly blew passed $33 trillion. On October 5, it pushed above $33.5 trillion.
Don’t forget about the $194+ TRILLION in unfunded liabilities that politicians promised the non 1%.
By the way, it only took Biden and his willing accomplices in Congress three months to drive the national debt from $32 trillion to $33 trillion.
As of October 5, the debt stood at $33,513,382,512,663.51.
This is an unimaginable amount of money.
To put things into some perspective, the total output of the US economy as measured by GDP was only $25.46 trillion. That means the US economy would have to grow by 33.5% to cover the national debt.
At $33 trillion, the US national debt is more than the total economies of China, Japan, Germany, and the UK combined.
Looking at it another way, as of Oct. 10, every US citizen would have to write a $99,839 check in order to pay off the debt, and every American taxpayer is on the hook for $258,257.
Part of the reason the debt has increased so fast since June is because the Treasury is still rebuilding cash reserves that were depleted during the debt ceiling fight. But the fact remains – the federal government spends too much money.
It’s hard to overstate just how bad the US government’s fiscal situation has become. We have a trifecta of surging debt, massive deficits, and declining federal revenue. The chart below provides a visual perspective – and it doesn’t even account for the last few years.
This relentless increase in debt is happening when the economy is supposedly strong. Typically, a strong economy generates more tax revenue, and deficits shrink. But this isn’t really a strong economy. It is a house of cards built on debt. Fiscal stimulus is helping to prop it up.
That means there is no end in sight to this upward-spiraling national debt.
The biggest issue is the federal government spending addiction. In August alone, the Biden administration spent over $527 billion.
In fact, the US can’t even afford the interest on the debt.
Uncle Sam’s interest expense is already rising at an astronomical rate, and it’s set to explode.
The federal government has paid well over half a trillion dollars ($630 billion) on interest payments alone in fiscal 2023, with one month left to go. Interest on the debt paid in July exceeded the amount spent on national defense that month. Uncle Sam is well on the way to spending more on interest payments than any line item other than Social Security and Medicare.
The average interest rate on the debt is now at the highest level since 2011, coming in at 2.92% as of the end of August. But that’s still relatively low, and the debt is more than double what it was back in the good ol’ days of 2011.
Meanwhile, the average interest rate is poised to climb rapidly. A lot of the debt currently on the books was financed at very low rates before the Federal Reserve started its hiking cycle. Every month, some of that super-low-yielding paper matures and has to be replaced by bonds yielding much higher rates. That means interest payments will quickly climb much higher unless rates fall.
To give you an idea of where we’re heading, T-bills currently yield about 5.5%, the two-year yield is over 5% and the 10-year currently yields around 4.7%.
This has driven interest payments as a percentage of total tax receipts to over 35%. In other words, the government is already paying more than a third of the taxes it collects on interest expense.
If interest rates remain elevated, or continue rising, interest expenses could climb rapidly into the top three federal expenses. (You can read a more in-depth analysis of the national debt HERE.)
People tend to yawn at the ever-increasing national debt, but it is a ticking time bomb. Who knows how much time is left, but the timer is ticking relentlessly toward zero.
Like President Biden enjoying a barbeque at The White House with a live band (probably NOT Justin Moore singing “Small Town USA”) while Hamas declared war on Israel and Americans are being held hostage with the promise of public executions of hostages livestreamed. Nothing that “Empathy Joe” does ever surprises me anymore, but I am surprise that various Federal Reserve Presidents will speak today while Hamas terrorizes Israeli and US citizens.
It could be that investors think that Talking Heads at The Fed will claim that Fed rate increases are over. Then again, the Iran/Hamas terror campaign against Israel is spookking markets, driving up oil and gold prices and driving up “flight to safety” in US Treasuries.
President Biden called on Americans in Israel to book a commercial flight home, even though Israel has cancelled all flights. Does Old Joe even read the news??
Confounded Interest - Anthony B. Sanders 
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