Well, to tell you the truth, in all this excitement, I’ve kinda lost track myself. But being as this is a .44 magnum, the most powerful handgun in the world, and would blow your head clean off, you’ve got to ask yourself one question: “Do I feel lucky?”

– Clint Eastwood as Dirty Harry

BALTIMORE, MARYLAND – Friday’s big news almost went unnoticed.

In all this excitement surrounding the assassination in Iraq… and the impeachment in Washington… and Harry and Meghan’s split from the royal family… who was going to bother to go all the way to the second section of The Wall Street Journal, page 10, to discover:

Fed Adds $83.1 Billion in Short-Term Money to Markets

The Federal Reserve Bank of New York added $83.1 billion in temporary liquidity to financial markets Thursday, as a top official said the central bank may keep adding temporary money to markets for longer than policy makers had expected in September.

As the saying goes, there is nothing as permanent as a temporary agency in Washington.

And there’s no more permanent form of inflation than temporary liquidity added by the Fed.

Fix-a-Flat Policies

The technical details behind the Fed’s fix-a-flat money policies are too complex for this Diary.

But the inquiring minds of our readers probably want to know: How come the Fed is pushing such huge amounts of “liquidity” into the market just when everything is going so well?

Isn’t the stock market at an all-time high? Doesn’t everyone who wants a job already have one? Aren’t corporations enjoying record after-tax profits?

Neither on Wall Street nor on Main Street is there any smoke, let alone fire.

And yet, there is the Fed on the scene, with its hooks and ladders… pumping more liquidity into the markets than it did during the crisis of ’08-’09.

Why is it drenching an economy that, on the surface at least, appears to be so robust and stout?

Blind, Deaf, and Dumb

The first part of the answer is simple enough. The Fed is trying to prevent markets from doing their job.

Credit markets match up lenders with borrowers. When interest rates go down, it tells lenders that no additional funds are needed… When they go up, borrowers see that they might need to back off.

But today’s biggest borrower is blind, deaf, and very dumb. It is the federal government itself, now borrowing money at the rate of $4 billion – more or less – each and every business day. And the feds don’t listen to the market; they bark at it.

So, where’s all the money going to come from?

Foreign buyers largely pulled out of the U.S. debt markets last year. Foreign central banks – led by Russia and China – are buying gold, not U.S. Treasurys. Birch Gold Group:

In 2018, foreign central banks bought levels of gold not seen since 2010. [In] 2019, according to 3rd quarter figures, […] banks bought even more; 12% more than in 2018. Last year, central banks purchased at least 550 tons of the “barbaric relic”, and it looks like they don’t plan to stop anytime soon.

[…] But central banks aren’t just buying gold, they are also demanding their gold storage be transferred away from offshore holdings and back to their own vaults.

Meanwhile, U.S. savings rates have been coming down for 70 years. As a net percentage of national income, they’ve fallen from 12% in the 1950s to barely 2% today. At 2%, with national income of about $19.4 trillion, that is about $388 billion. That’s not much “cover” for a government that borrows $1.2 trillion per year.

And don’t expect savings to go up. Typically, people save when they’re in their 40s and 50s. Then, they spend their savings as they go into retirement. Since more and more people are retiring, savings should be going down. Which leaves fewer buyers for U.S. Treasury bonds.

Government Enabler

Corporate America isn’t any help either. Analysts estimate that earnings for the last quarter of 2019 fell 2%. Real, pre-tax earnings have been in a downtrend for the last five years. And instead of providing funds for Uncle Sam, corporations have been competing for savings.

While households generally reduced their debt following the ’08-’09 crisis, corporations borrowed heavily and now owe nearly $10 trillion.

So, when the feds’ latest big wave of borrowing hit the markets in mid-September of last year, there were few lenders and little ready cash waiting for them. All of a sudden, interest rates in the short-term funding (“repo”) markets shot up over 10%.

This is the rate banks pay each other when they need to borrow money. And sometimes they have no choice. Designated big banks are required to buy the feds’ paper, like it or not. And to get the funds, they borrow in the “repo” market.

In a properly functioning market, 10% interest rates would quickly cool the borrower’s enthusiasm. “Whoa,” he would say, “time to rethink this plan.”

But the feds don’t think once, let alone twice. They’ve got an enabler – the Fed. It’s bought about 90% of all new U.S. Treasurys for the last three months. This is reflected in the Fed’s debt holdings… which have gone up about $300 billion since September, and will soon return to their all-time highs set after the last crisis.

So you see, Dear Reader, as we enter the ’20s, America’s trajectory for the 21st century becomes clearer and clearer: war overseas… and monetary inflation at home.

And here, we chuckle with the shades. The dead generations know: War and inflation are always more fun at the beginning than at the end. So we have to ask ourselves a question: Do we feel lucky?

Regards,

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Bill

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