With such a horrendous track record, why on earth did the United States conduct a multibillion-dollar bailout of Argentina and how on earth did the U.S. manage to make money on the deal?

The why is fairly simple and straightforward, with just two components.

First, Javier Milei is regarded as a friend to the current Trump administration and a strategic partner. Supporting the Argentinian government fulfills both financial and nonfinancial interests in the Western Hemisphere.

Whether that’s true or not isn’t the point—we’re just laying out the thinking here of the White House. Milei is considered to have “Trumpian” qualities, especially the ways in which the former has been cutting down the size of government and going after more left-wing causes in his country.

The second “why” behind the Argentina bailout is that it wasn’t really a bailout, at least not in the traditional sense. In truth, it was a way for the Treasury to make easy money.

Yes, you read that right. And this is where things get really interesting.

It was clear that international investors were beating down the Argentine peso because of the country’s terrible financial position. For years, Argentina has been bouncing between inflation and hyperinflation as the central bank prints money to cover never-ending budget deficits.

That’s how you get annual inflation rates in the hundreds of percentage points. Imagine the worst annual inflation in the U.S. during 2022 was happening in a matter of days instead of a year—that’s what Milei has been trying to fix.

So, far he’s done a decent job, getting inflation down by a whopping 90% to just one-tenth of what it used to be. The government also recently posted its first budget surplus since 2009.

Ironically, the strengthening of the government’s previously precarious financial position was what set off this miniature crisis.

Let’s just consider our own situation in the U.S. to explain why the government sobering up could be so disastrous.

Imagine if the Federal Reserve suddenly called it quits on covering government shortfalls and bailing out bad financial actors. No more inflation, just liquidation.

Instead of papering over losses with paper money, the Fed would allow those losses to be realized, whether by consumers, banks, businesses, investors, or Uncle Sam.

Worse, the current federal deficit would cause Treasury yields to skyrocket without the Fed as debt purchaser of last resort. Congress remains so out of control with its spending that October’s deficit was the worst start ever to a fiscal year—even worse than the blowout spending in 2020.

Besides Treasury market chaos, banks would start collapsing left and right without an entity to buy all their junk securities packaged as “investments” and to cover the over 90% of deposits that aren’t covered by cash.

Americans would see 401(k)’s plummet, along with home prices.

Then gold and silver would hit levels previously unimaginable, not because of dollar devaluation but a flight to safety.

In short, the whole facade comes crashing down. The managed destruction of the dollar via inflation is the glue keeping this fragile system of ours together.

The financialization of everything and the perpetual bailout systems the Fed has built are the monetary equivalent of a series of codependent relationships between 100 different people—and just as destructive.

If you want to stop the inflation here at home, you’d need to first slam on the brakes of all the things that require the inflation. For starters, that means massive cuts to government spending.

Ironically, Argentina was following this formula, yet still nearly fell into the abyss. Milei was cutting whole departments and firing bureaucrats everywhere while slashing the budget. How’d the situation spiral out of control?

Because investors got overly optimistic. They stopped abandoning the Argentine peso. Some even piled in. The peso’s freefall became a managed decline, then an erratic decline.

The currency was still losing value, but not fast enough. Remember, inflation has been the glue holding the fraud together. Without enough of it, things start falling apart.

Since the peso wasn’t falling fast enough, many trades began unraveling, just like we’ve seen with the Yen-carry trade recently. International trade was also affected, as were sovereign debt markets.

It also imperiled Argentina’s ability to repay loans as the peso became more than 50 percent overvalued. Instead of paying back cheaper money, Milei was doing the opposite.

Well, not quite the opposite—the currency was being devalued, but not nearly as fast as previously estimated. That meant the money going out the door was worth more than they thought it’d be worth.

Without the central bank rolling out tons of new pesos, Milei was finding himself short and in desperate need of a cash infusion, especially if his government was going to continue repaying international loans on time.

What he needed was either a lot of pesos or a lesser quantity of another currency that people wanted more.

Enter Treasury Secretary Scott Bessent, the Sultan of Swap.

Here’s the quick and dirty version of the agreement between Argentina and the Treasury:

The Treasury would use its special drawing rights at the international monetary fund to dump cash into the exchange stabilization fund, with the latter financing a currency swap so that Argentina could use dollars while it’s short on pesos.

The swap is similar to something else our readers have seen time and again: repurchase agreements.

Currency is exchanged not once but twice. So, Argentina first hands the Treasury a pile of pesos and gets a sack of dollars, at a specific exchange rate. Then, at a previously agreed-upon date, the swap matures and the exchange is reversed.

In normal times, when currency markets are functioning properly and currencies are relatively stable, there’s no reason to do such an exchange and there’s certainly no arbitrage.

But these aren’t normal times—not by a longshot. And Bessent knew it.

What he recognized was that markets were out of balance, and he could take advantage of the opportunity. A very crude parallel would be a put option or call option.

Of course, the nature of a swap means the change in relative currency values is not where the money is. Although you do guarantee a future exchange rate, it’s the same as the original.

The real arbitrage lies in the ability to utilize one currency over another when there is a temporary increase in demand for one currency over another.

In exchange for this temporary use of dollars, the Treasury is getting interest and fees.

Amazingly, Bessent is probably the first person in history to make money buying Argentine pesos. When we say he’s the master of sovereign debt markets, we mean it.

After all, this is the guy who broke the Bank of England, the world’s oldest central bank, in 1992—not even one month after his 30th birthday.

In short, Bessent knew which way the peso was going to go relative to the dollar because he constantly has his finger on the pulse of currencies and which currencies are being over/undervalued by markets.

That knowledge allowed him to make a deal that gave the Treasury the right to exchange currencies at a value that may not necessarily have made sense at the time to the rest of the market but would in the future.

As usual, Bessent was right.

This is why the Treasury has made money on the deal, contrary to Bessent’s initial critics who have once again been proven wrong.

Flush with dollars to settle accounts, Argentina almost instantly calmed investors, traders, and other market participants.

Does all this mean Argentina is in the clear? Far from it.

A good parallel is the current cost-of-living crisis in America. In 2025, inflation-adjusted earnings have grown about 1 percent, but they fell about 4 percent over the previous four years. We’ve made progress this year, but we’re still not “back.”

Likewise, Argentina has made incredible progress in a very short period. Inflation has fallen from several hundred percent annually to about one-tenth of that. Government spending is being slashed with a chainsaw—literally.

But Argentina is still not in great shape, and that’s why it would be unreasonable for that country to have a credit rating of AAA+ or its equivalent depending on the ratings agency.

Argentia is saddled with years of bad debt from years of horrendous budgets created by many terrible “leaders.”

Nevertheless, the country is finally headed in the right direction, and that should be priced in to Argentinian yields too—direction and magnitude sometimes matter more than position.

Bessent understood that markets were beating down Argentina for past mistakes, not current corrective action, and so the pseudo-bailout made sense.

As did extending a further line of credit. This dollar backstop essentially instills so much confidence that it’ll never have to be used. If people thing the peso is as good as dollars (at some specified ratio) then people don’t mind holding peso.

And that’s why, ultimately, Argentina will likely dollarize, a move which could be mutually beneficial for both countries.

First, it allows Argentina to use a more desirable currency on the world stage, giving them much needed flexibility. Second, it provides some much-needed demand for all the dollars Uncle Jerome is about to print when he restarts quantitative easing in the coming weeks or months.

So, don’t cry for Argentina—the country will be fine. Cry instead for us if Congress doesn’t get its act together, and soon.

Our elected representatives put drunken sailors to shame—both in terms of spending and in terms of alcohol consumption—so it’s hard to see how we’ll evade Argentina’s fate in the long run.

Of course, when the world’s biggest economy gets there, who will bail it out?

When the world’s reserve currency needs a lifeline, who conducts the swap?

Food for thought…

To understand why, we’ll do a recap of the financial plumbing in the Fed-controlled system, which you can of course read in greater detail in our earlier posts. But here’s what you need to know right now.

The Fed has painted itself into a corner because they’ve actually abandoned most of their monetary tools, at least for their traditional purposes. Under Powell, the Fed has chosen to turn the dials mostly to influence the financial plumbing, not inflation or the labor market.

In truth, those last two are secondary considerations, despite them being virtually all that Powell and his colleagues discuss—their “dual mandate.”

What Powell & Co. are really laser focused on right now is liquidity and bank reserves, the latter being the money that banks have parked at the Fed. For about a century, the only reason banks kept money parked idle in the Fed vaults was because they had to.

Not so today. The Fed abolished the reserve requirement in 2020 and started paying banks interest on reserves (for several years prior, the Fed paid interest on “excess reserves” which was anything above the reserve requirement).

Powell & Co. also expanded the reverse repurchase agreement (reverse repo) facility which essentially functioned the same way.

Reverse repos pay interest just like bank reserves, and there’s only a few basis points difference in the rates. In both cases, the Fed is keeping liquidity on the sidelines—ready for action, but out of the fray.

Repos and reverse repos were supposed to be like shock absorbers, temporary ways for the Fed to quickly inject or absorb liquidity, respectively. It’s faster than changing open market operations and it’s not permanent since these are short-term loans, not mere exchanges like the purchase or sale of securities.

But the Fed changed the rules of the game after the unprecedented money printing that began in 2020. When reverse repos were exploding, that was the signal for the Fed to call it quits, but they didn’t.

The Fed kept printing.

Reverse repos at the New York Fed (the main trading desk, though all 12 branches have one) topped out at over $2.5 trillion, partly due to an end of year spike as liquidity looked for somewhere to go when banks were awash with cash to appease regulators.

When the Fed belatedly stopped buy securities—euphemistically referred to as quantitative easing, or QE—and then started selling assets—that’s quantitative tightening, or QT—the liquidity drain was on.

The Fed had finally pulled the plug on the overflowing bathtub and the water level started falling.

But much of what happened initially was transferring spilled water back into the tub so that the level didn’t fall much. As a very loose analogy, think of the reverse repos as towels that had soaked up the overflowing water on the floor and draining the reverse repo facility was like wringing out those towels back into the tub.

Fast forward to today and the reverse repo is completely drained. For several days, we’ve seen the repo facility be tapped, meaning the Fed is injecting liquidity.

Of course, the sums here are so trivial that they’re not even rounding errors for the Fed. Two or three billion dollars a day in a repo market that’s well over $1 trillion is effectively nothing.

But that brings us to what we forecasted a while ago: the Fed has drained all the liquidity it can before things start running too dry.

Since Powell & Co. are primarily focused on the financial system’s plumbing, this will force their hand into adding liquidity.

A.K.A., printing money.

The first step in this process has already been expressly said by Powell himself during a recent public address, wherein he declared QT would end soon. Of course, that’s just step one.

Will this solve the Fed’s underlying problem? No, not at all. It merely buys time. And very little time at that.

The Fed’s pyramid scheme requires bank reserves to grow over time, essentially maintaining ratios with things like the size of the economy or the level of bank assets. The problem for Powell & Co. is that those things are growing.

That means bank reserves have to grow, or things will start to break. QT, rather problematically, has been reducing bank reserves ever since the debt ceiling was lifted earlier this year and the Treasury then had to compete with the Fed for loanable funds.

The result was banks deciding to lend to Bessent instead of Powell.

And that’s drying up bank reserves, not to a historically low level, but one that’s below the ridiculously high level of “abundant” reserves and is not just “ample” reserves—what some call the DANGER zone.

Just like the Autumn of 2019, the Fed today is starting to lose control, first of interest rates and then something much worse.

The latest secured overnight financing rate (SOFR) is at the upper bound of the Fed funds rate target range, and SOFR has recently even exceeded this upper bound a couple of times.

Similar to backwardation, we’ve seen overnight lending become more expensive on secured than unsecured loans via Fed funds—a sign something is amiss at best and terribly wrong at worst. Powell & Co. are on the verge of losing control.

But they won’t, of course. They’ll take even more control instead. And that starts with ending QT, which will happen at either this week’s meeting or the next.

There’ll be no more runoff of Treasuries and as old ones on the balance sheet mature, the Fed will simply buy new ones to replace them. However, this only stops the destruction of bank reserves—it doesn’t increase them.

And that’s where the next round of QE comes in.

It may take the Fed a few more months, but the system they’ve built requires more bank reserves over time, and just maintaining the status quo of the balance sheet’s current level will soon push the system below “ample” reserves.

That’s when we go to “scarce” reserves territory and the Board of Governors run around with their hair on fire.

What if the Fed cuts rates at the same time they stop QT? Surely even more easy monetary policy will help, right?

Unfortunately, no. Returning to an earlier point, Powell & Co. have straightjacketed many of their monetary tools into plumbing tools only, so very few dials can be turned without having adverse and counterproductive consequences.

Each time they cut rates, it reduces the incentive for banks to keep money parked at the Fed in reserves. This could very quickly exacerbate the problem as banks pull money out of Fed vaults and loan it to the Treasury or the private sector.

Ironically, Powell & Co. might need to step on the gas and brake at the same time to increase reserves at flank speed: QE (gas) to regrow the balance sheet and push liquidity into the system while hiking rates (brake) to incentivize banks keeping more of that liquidity in reserve.

That’ll cause reverse repos to zoom back up as the Fed works to maintain an interest rate floor while flooding liquidity into the banks.

Of course, this is a recipe to strangle the real economy while paying tons of interest to the bankers. Sound familiar? That’s because we’ve lived through a version of that for the last several years, with both financial firm profits and asset prices exploding higher, but the average Joe just gets inflation.

Today, it also means the Treasury has to compete vigorously for loanable funds, which is making it more expensive to finance the national debt.

Regardless, “Printer is Coming.”

This isn’t a secret and the well-informed in the financial sector know it. That’s why they began buying gold when we alerted readers to do so as well. And guess what? They’re still buying. Even at well over $4,000 an ounce.

That should tell you something.

Much of the coming QE is already priced into gold because the smart money saw the writing on the wall earlier this year when liquidity was just getting tight, even before the government could borrow because of the debt ceiling.

And as soon as that restriction was lifted, the plumbing system got much worse—exactly as expected.

So, how to look at the coming storm? In brief, it’s a buy-everything opportunity. That doesn’t mean the real value of everything is going to increase, but rather that the price of everything will.

As the dollar loses value, it’ll take more of those dollars to buy anything and everything.

Stonks go up, as it were.

But things with a monetary premium or financialized assets (like gold, silver, Bitcoin, housing, collectibles, etc.) tend to appreciate in price much more during these episodes.

The return of QE is very bullish on a whole lot of stuff, but will of course cause much more inflation, impoverishing everyone and siphoning off the real value of countless people’s savings and earnings. It is, as Lenin correct said, the best way to destroy the capitalist system.

Powell thought he could engineer the mythical “soft landing” scenario—which has never, ever been achieved by the Fed—wherein he would bring down inflation and not create a recession. Powell was wrong, and now he’s choosing “no landing,” meaning we stave off a recession in exchange for the inflation.

In that sense, we all lose—but you can mitigate the damage in your own life.

Now, if the Fed’s plan is so terrible, what’s the solution? Get back to basics.

The central bank needs to reinstitute the reserve requirement, first and foremost. Stop paying banks not to lend. Second, don’t stop but accelerate the balance sheet runoff.

Wait, won’t that lead to a catestrophic collapse in the money supply? Not at all. It will be directly countered by banks loaning money that was previously parked at the Fed.

Third, let the Fed funds rate float and just set the discount rate (price to borrow directly from the Fed) at a steep penalty to the prior day’s Fed funds rate. This same methodology can also be used on both repo desks until they eventually get shut down too.

Is that all pie in the sky, wishful thinking? Probably.

But until the Fed finally does the right thing, we’ll still be figuring out how to protect ourselves from their mistakes.

The economy added 147,000 jobs last month, significantly more than the consensus estimate on Wall Street. The unemployment rate declined to 4.1 percent, also defying expectations as the number of people unemployed declined by 222,000. Even better than the number of people getting jobs is the quality of those jobs and who’s getting them.

Astonishingly, all of the net job growth in June came from full-time work. Indeed, the number of part-time jobs actually declined. A growing number of Americans were able to secure better paying jobs with benefits instead of only gig work or side hustles.

This trend has helped increase the average American’s weekly paycheck, which has risen faster than inflation since President Trump took office in January. That’s a stark contrast to Mr. Trump’s predecessor, who oversaw a 4 percent decline in the inflation-adjusted value of those weekly paychecks.

And unlike the last administration, the labor market is no longer depending on a massively expanding federal workforce to pump up the monthly job numbers. Federal payrolls (excluding the postal service) have declined every month this year as Mr. Trump slashes the bureaucracy in Washington, D.C.

The decline in the federal workforce this year has completely offset hiring by state and local governments. The Bureau of Labor Statistics’ household survey shows the number of people employed by the government fell more than half a million in the first half of this year.

Mr. Trump has thus far been wildly successful in shrinking government bureaucracy and reprivatizing the economy. This is vitally important in getting the economy—and the American family—back on its feet by shifting employment and resources away from the unproductive public sector to the productive private sector. As government jobs are vanishing, private employment is rising.

Furthermore, the rate at which these good jobs are increasing is better than previously estimated. The June jobs report revised up the number of payrolls in May and April, meaning the economy had even more jobs than initially thought. That’s in stark contrast to what happened under the Biden administration, when jobs numbers were routinely revised down after overly optimistic estimates.

It's also worth noting who is getting all the jobs being added to the economy. During the Biden administration, native-born Americans were essentially left behind in the labor market recovery. By December 2024, there were 716,000 fewer native-born Americans employed than in December 2019 before the pandemic, with all net job growth over that time going to foreign-born workers.

Today, the situation has reversed. Over the 12 months ending in June, job growth among native-born Americans was 1.4 million higher than among foreign-born workers. In fact, this was best June ever for employment among native-born Americans, setting a new record of almost 133 million.

It’s important to note that these data collected by the Labor Department on native-born and foreign-born employment is not seasonally adjusted, and that has implications for how to interpret these numbers.

For example, the number of native-born Americans with jobs typically surges in June and July as millions of high school and college students take on summer jobs. Conversely, this employment level drops in August as those young people return to school.

A similar seasonal pattern occurs near the end of the year, as many people get part-time work before Christmas, pushing up employment at year’s end, followed by a plunge in January. That’s why month-to-month changes are an apple-to-oranges comparison, and the annual changes are much more meaningful.

Hence, although it’s technically true to say employment among native-born Americans has increased by 2.1 million under Mr. Trump, a portion of that increase is just the normal seasonal change. A better analysis is to compare June’s annual change in jobs held by foreign-born workers with those held by native-born Americans. By that metric, Mr. Trump has hit a home run.

Employment among native-born Americans rose 1.4 million more than among foreign-born workers in the 12 months ending in June. That’s a stark contrast to the final 12 months of the Biden administration, during which time jobs among foreign-born workers rose 1.2 million faster than jobs among native-born Americans.

What a difference a President can make!

This article originally appeared in Townhall and has been reprinted here with the author’s permission.

The simple reason is that we’ve entered a fiscal dominance regime, a kind of positive feedback loop. In short, here’s how it works.

Massive federal deficits necessitate equally massive borrowing. That pushes up the demand for loanable funds, which in turn puts upwards pressure on the price of loanable funds: the interest rate.

And that’s where things get tricky because, as noted in a previous post, the interest rate plays an increasingly large role in determining the size of the deficit. One of the Treasury’s expenses—in fact, the biggest line item in the June monthly Treasury statement—is the interest paid on the $36.7-trillion federal debt.

For the first time in modern American history, the cost of financing the debt is more than the Department of Defense, more than the Department of Health and Human Services, and more than the Social Security Administration. At $144 billion in June, it was equal to a quarter of all federal revenues that month.

The interest expense is a function of both this monstrous outstanding debt balance and the average interest rate. As the interest rate climbs, so does the financing cost on the debt.

Because the deficit is so large, any marginal spending is, by definition, borrowed. The larger interest expense directly increases deficit spending, which mean even more demand for loanable funds and even more upward pressure on interest rates.

Now you can see how this is a downward spiral. Once you’re in a fiscal dominance regime, it’s just lather, rinse, repeat. In short, we’re in serious trouble and it’s the kind of trouble that yields oodles more inflation—because politicians won’t take their medicine.

There’s just no good way out of the mess that is today’s federal finance situation. We say that as folks who have the utmost respect for and confidence in Treasury Secretary Scott Bessent. We also give President Trump more credit than most for wanting to cut spending.

But we’re also political realists who recognize that Congress is not willing to play ball, and they’re the ones who ultimately decide how much to spend.

It was very telling that the clowns in Congress could barely pass a rescissions package put together by Russ Vought (Director of Office of Management and Budget). The package was less than $10 billion—not even 0.2% of annual federal spending.

With the debt ceiling lifted, Bessent is slow walking the refill of the Treasury General Account so as to not upset sovereign debt markets when yields are already at about 5 percent. That’s much smarter than what former Secretary Janet Yellen did. Still, it doesn’t solve the problem of inordinately large federal deficits.

With Congress unwilling to cut the spending and reduce deficits, interest rates should steadily climb. But we don’t have free-floating interest rates like we have free-floating prices in most markets. Instead, we have a cartel called the Federal Reserve.

And if the Fed wants to continue its existence, it has to keep Congress happy. Afterall, Congress made the Fed and can unmake it. The hard truth is that even when Powell gets replaced in May, his successor is not going to be an inflation hawk.

Even if Trump nominated an inflation hawk, like Judy Shelton, that person would never get approved by Congress because those clowns want to keep spending like drunken sailors and they want us to pay for it through the hidden tax of inflation.

Recall that the vaunted Paul Volker, who many remember as the great inflation slayer, managed to get the annual inflation rate below 2.5 percent for only 12 months during his entire 8-year tenure as Fed Chairman. When he left the Fed in August 1987, the inflation rate was back up to 4.3 percent.

The point is that there was only so much he and Reagan could do when Congress refused to cut spending in any meaningful way. That’s what we’re facing today. The best we can hope for is to grow faster than the inflation and get some small real gains.

Reagan’s formula of tax cuts and deregulation succeeded in delivering blockbuster, double-digit growth, but only for a limited time. After 18 months, growth remained robust but never ventured back to 10%+ territory.

Of course, because the situation in federal finance is much worse today, growth alone won’t get us out of this mess, which is why there’ll be inflation. America would need sustained growth of 7 percent per annum to outrun the debt monster that’s chasing us. That’s not going to happen.

Inflation is a way to shrink that monster, so it doesn’t look quite so scary. It reduces the real value of what we owe, transferring wealth away from wage earners, savers, creditors, etc.—and giving it to the politicians and well-connected donor class.

In short, it’s evil.

But morality aside, the math here is very clear. The debt is on its way to $38 trillion. Yields are converging around 5 percent. That’s $1.9 trillion in annual interest. Even if a future dovish Fed cuts rates like they did in the Fall of 2024, that doesn’t mean yields will decline.

As the Fed cut 100 basis points last year, Treasury yields rose 100 basis points because everyone smelled a rat and knew it was monetary malfeasance. The only way for the Fed to be sure it’ll get yields down (which is what the president and Treasury secretary want), will be to buy all the Treasury bonds it can.

That’s straight-up monetization of the debt. And that’s good for those holding assets like equities, commodities, and general anyone who is a debtor. Good in the nominal sense at least, since those things appreciate faster during inflationary periods and debt denominated in dollars declines in real value.

How much faster asset prices rise helps determine how valuable those asset classes are for inflation protection.

Our loyal readers will remember when we correctly forecasted gold would hit $2,500 an ounce. And then $2,750. And then $3,000. And now the yellow metal still has room to run. How much more? And what else offers protection?

Read more

When President Biden took office, homeownership was not only affordable, but more affordable than the long-run average. But as the government spent the nation into oblivion, that quickly changed.

To accommodate the profligate spending of Biden and the radical liberals in Congress, the Federal Reserve created trillions of dollars out of nothing and purchased debt issued by the Treasury. Simultaneously, the Fed kept interest rates artificially low to reduce borrowing costs for the federal government.

These monetary manipulations sparked the worst inflation in over 40 years. Prices everywhere exploded, but housing costs were particularly hard hit. That’s because the same artificially low interest rates that made it cheap for the Treasury to borrow also made it cheap for potential homebuyers to borrow—and borrow they did!

What people really care about when it comes to buying a home is not so much the home price as the monthly payment, since that’s what must fit in their budget. Record low interest rates allowed potential homebuyers to get ever-larger mortgages and thereby bid up the price of homes for sale, on top of the rising prices from inflation.

The party was not to last, and the worst inflation in four decades was predictably followed by the fastest rise in interest rates in just as long. Suddenly, mortgages interest rates below 3 percent were replaced by nearly 8 percent rates. When monthly mortgage payments quickly doubled, demand dried up, and the housing market began to seize.

The situation also rapidly deteriorated for homeowners, whose below-3-percent mortgage interest rates became golden handcuffs. Selling a home almost always means losing the old interest rate and getting a new mortgage at today’s rates. Therefore, sellers faced the same prospect of their monthly payment skyrocketing if they borrowed the same amount for a new home.

The only way to make the math work in this situation is to sell an existing home for such a large premium that the owner has a very large down payment for the next home, reducing the amount borrowed and the size of the next mortgage. That offsets most of the pain from the tripling of interest rates.

It also means that the price of the median existing home is so stratospheric that it has eclipsed the price of the median new home—a rarity. It’s especially shocking since new home prices have never been higher.

Inflation has pushed up the cost of new home construction by a third in less than five years. Homebuilders today can’t lower their prices, despite high interest rates, because they need to cover their record-high costs on materials and labor. Since many homebuilders finance their projects with credit, high interest rates are another cost increase.

It’s no wonder homebuilder sentiment has collapsed to the lowest level in years while pending home sales are near a record low and a full two-thirds of Americans think homeownership is out of reach for those under 40. The deadly one-two punch of high home prices and high interest rates has essentially killed the starter home.

It’s tempting to blame this problem just on high interest rates and then call upon the Fed to lower rates as an easy fix. But that would merely treat a symptom, not a cause, and any relief to the housing market would be temporary.

Artificially reducing interest rates by one or two percentage points again would simply allow potential homebuyers to borrow more, restarting the bidding war while also sparking more inflation. Pushing interest rates below 3 percent again would eliminate the premium on existing mortgages, but would cause even worse inflation and necessitate even higher interest rates thereafter.

The only way to really thaw this frozen housing market is to allow interest rates to fall naturally. The interest rate is just the price to borrow money, and the biggest borrower is the federal government. Excessive borrowing in Washington DC is the real reason everything from mortgage interest rates to Treasury yields to credit-card interest rates are sky-high today.

Reducing government borrowing will reduce the demand for borrowed money, and that will bring down the price, which is the interest rate—it’s Econ 101. Therefore, if Congress wants to help the housing market, they must spend—and borrow—less money.

This article originally appeared in Townhall and has been reprinted here with the author’s permission.

Musk’s success in so many fields is no accident. The man has an uncanny ability not only as an executive who optimizes institutions and procedures, but also as a delegator. After he gets a project going, he expertly selects someone to take his place, freeing himself up for other ventures.

This explains why Musk is able to run so many different, but still wildly successful businesses, including Tesla, Starlink, X Corporation, the Boring Company, Neuralink, and others. He consistently replaces himself with capable people who can take over operations in his stead.

This model of leadership handoff in the private sector has translated to the public sector with DOGE, so the American people should anticipate continued success from the Department, even now that Mr. Musk has departed.

DOGE has made remarkable progress, yet they’ve still only scratched the surface. The reality is that the federal budget is almost $7.5 trillion, and it’ll take a considerable amount of time for the DOGE crew to work their way through it all.

That said, the early progress made by Mr. Musk specifically and DOGE broadly is all the more remarkable because of all the roadblocks thrown in their way. Activist judges were constantly ordering a halt to DOGE’s activities, while apparatchiks left over from the Biden administration purposely hid information and tried to torpedo DOGE’s investigations.

As each roadblock is removed, however, the pace at which DOGE works through the federal budget is steadily increasing, and that will continue even after Mr. Musk’s departure. This is not the end of a book, but simply a new chapter.

DOGE has been successful in two key areas. First, sunlight is the best disinfectant, and the Department has cast blindingly bright light on all manner of abuse, corruption, fraud, and waste—all of which the political establishment would have liked to have kept hidden from public view.

By making the American public aware of how their tax dollars are being wasted, political pressure was created to stop that waste. But it all required knowledge of the problem.

Before DOGE, for example, there was no proof that over 12.3 million people were 120 years old or older in the Social Security system, a clear sign of fraud. They have now been correctly labeled as deceased to prevent illegitimate payments.

Likewise, the public was completely unaware that the Treasury Department was distributing money with no way of tracking where it was going. Because of DOGE, the Treasury and the Federal Reserve now label every payment, so the spending of tax dollars can be tracked.

While some of the waste identified by DOGE can simply be ended by executive action, much of it will need to be clawed back by Congress. To that end, DOGE cuts will begin to be codified into law as early as next week when the White House begins sending recission packages to Congress, the first of which will be over $9 billion.

That’s a good start, but only a start with the aforementioned $7-trillion-plus budget. To realize the hundreds of billions of dollars in potential cuts that DOGE has already identified (and much more in anticipated cuts) will require additional recission packages—and in some cases, new legislation.

As for Mr. Musk and his many companies, they have bright futures because of their leader’s proven track record of success. While companies like Tesla have seen turbulent stock prices over the past few months, that has largely mirrored the broader stock market, as opposed to being a reflection on Tesla’s valuation specifically.

Furthermore, Tesla’s share price has risen 60% since failed vice-presidential candidate Tim Waltz infamously mocked the previous decline in Tesla’s share price. Who’s laughing now?

Whether it’s Tesla, DOGE, or X Corporation, the future looks very bright. Mr. Musk has a real knack for building both metaphorical and literal rocket ships.

This column originally appeared in Fox News and is used here with the author’s permission.

This was part of the Democrat’s unconstitutional push to “forgive” student loans—euphemism for taxpayers bailing out borrowers. As we wrote last year, the courts repeatedly struck down these schemes, which were little more than attempts to buy young people’s votes.

Yet even after the courts forced the Biden administration to restart student loan payments, the administration simply came up with new workarounds to sidestep the law. One of these was to appease the courts by technically requiring borrowers make payments but then also removing—or at least delaying—any consequences for failing to pay.

This was accomplished by keeping under wraps how many borrowers were in default on their student loans. For the last year of the Biden administration, data on delinquencies was not made available to credit bureaus, so millions of borrowers made no payments, and their credit reports remained immaculate.

As proof of their malicious compliance, the Department of Education even advertised to borrowers that failure to make payments would not be reported to credit bureaus.

With official data of loan nonperformance (defaults and delinquencies) on federal student loans being kept hidden, the only data available to the public indicated that over 99 percent of student loans were being paid and a mere fraction of 1 percent of borrowers were behind. The reality was vastly different.

With President Trump’s Department of Education honestly reporting the data, the Federal Reserve Bank of New York and Equifax have confirmed that millions of student loans were seriously delinquent during the last year of the Biden administration, but this information was purposely hidden from taxpayers and voters.

As of the first quarter of 2025, nearly 8 percent of aggregate student loan debt now has payments over 90 days late, compared to the half of 1 percent that was previously disclosed. The rate of serious delinquencies is literally over 1,000 percent (7.2 percentage points) worse than the Department of Education claimed, and the worst in five years.

What’s even more troubling is that these delinquencies come after the Biden administration already bailed out student loan borrowers to the tune of almost $190 billion. It’s reasonable to assume that student loan nonperformance would be at a record high today if these unpaid bills hadn’t been foisted on taxpayers.

For the sake of portraying an overly rosy picture in an election year, the last Democrat administration prompted millions of borrowers to fall behind on their debt payments, using the money instead to boost consumer spending figures in the leadup to a hotly contested presidential race where the economy was center stage.

The result was taxpayers not receiving their money back in a timely manner—and now millions of people just saw their credit scores take a triple-digit hit. Worse, these delinquent borrowers will soon find themselves in the collections process.

That’s not to say taxpayers should have sympathy for these borrowers. The number of college graduates employed today is at a record high while this cohort’s unemployment rate is near a record low. They also average significantly higher lifetime earnings than their non-degreed counterparts, so it makes no sense to force lower-income families to pay for higher-income individual’s loans. If anyone is undeserving of a bailout, it’s them.

However, the culpability of borrowers is a distraction from the fact that this whole situation wouldn’t have happened but for the Biden administration’s unconstitutional attempts to defraud taxpayers in exchange for the votes of young people, all while scandalously hiding evidence from the public.

This column originally appeared in Townhall and is used here with the authors’ permissions.

First, a recap. There are two sides to the repo market, and they work exactly the opposite of one another. On the one side are repos which are a way for the Fed to inject liquidity on a very short-term basis, as in an overnight loan.

It works like this: the Fed offers to loan money for 24 hours at a specific interest rate. When you repay the loan tomorrow, you give your regional Fed bank the principal plus the interest. The loan is collateralized (typically with treasury bonds) to ensure repayment.

Thus, while repos allow the Fed to very quickly add tremendous amounts of liquidity, that liquidity is then subtracted back out of the financial system the next day. To keep the liquidity infusion going, Fed banks (chiefly the New York Fed) would need to continuously, day after day, make these short-term loans.

Of course, that’s an expensive way for financial firms to increase liquidity over the long term. They’d typically rather sell an asset to the Fed and get cash that way because it doesn’t involve paying any interest.

And that’s exactly what happens when the Fed conducts open market operations and buys bonds. Now the Fed gives exchanges money it created out of nothing for bonds held in the private market. Unlike repos, this is a permanent exchange.

And that’s where repos get their name—the asset is not just purchased but then it’s also repurchased at a specified future date. Historically, the market was constantly tapping this rep facility at the Fed for a relatively low volume of loans, but that all changed with the global financial crisis and the institution of ZIRP (zero-interest-rate policy)…

When the mortgage meltdown was in full swing in 2008, leverage once again became a dirty word as the financial house of cards built on subprime mortgages came crashing down. Loans out of the repo facility quadrupled as everyone turned to the “lender of last resort.”

Eventually, the Fed bought so many bonds and then mortgage-backed securities that the money supply exploded, and firms were awash in liquidity. The repo facility basically went from record usage to nothing in a year because of open market operations that forced interest rates to zero.

That situation remained until the Fall of 2019 when the Fed overtightened by selling off too much of its balance sheet and the central bank briefly lost control of interest rates, with overnight rates zooming higher. Desperate for liquidity, banks turned to the repo facility for volumes of cash twice as high as the record set a decade prior.

By the start of 2020, the Fed had added sufficient liquidity through open market operations the repo usage was plummeting back down, having fallen more than $100 billion.

But then the government shut down the economy in March. Repos went up like a rocket.

Unlike in the global financial crisis or the Fall of 2019, the Fed pulled out all the stops in the Spring of 2020 and bought literally everything in sight. In little more than three months, the repo facility went from almost $450 billion to nothing and stayed there for three years.

That’s when the Fed created a regional bank crisis and financial firms were once again desperate for short-term cash infusions. Repos spiked, but only briefly and the magnitude was relatively small because the Fed created a whole new lending facility for anyone who got on the wrong side of the interest rate trade—it was another bailout.

So, what do these repo volumes tell us? What way to interpret them is as a measure of the relative size of the Fed’s balance sheet, given the Fed’s interest rate target range and the relative quantities of demand and supply of loanable funds. Let’s illustrate this to make it clearer.

When the government shut down the economy, lots of people panicked, including the government. People were hoarding cash and didn’t want to lend any money in the form of buying bonds, at precisely the same time the government was trying to sell trillions of dollars in new bonds. The supply of loanable funds fell, and the demand rose.

Econ 101 tells us that this results in a higher price. In the loanable funds market, the price is the interest rate. When the prevailing market interest rate for short-term loans exceeded the interest rate offered by the Fed on repos, everyone surged into the latter trade.

That explains a very important function of repos: they’re a way for the Fed to maintain a ceiling on interest rates. Given market conditions, an increased use of the repo facility means the Fed’s balance sheet is too small. Alternatively, the interest rate set by the Fed is too low, given the balance sheet’s size.

Let’s stick with the first interpretation in this example. As the Fed went on its biggest buying spree ever, it doubled the balance sheet to almost $9 trillion. With such ample liquidity, there was no difficulty in maintaining a ceiling on interest rates, so repo usage evaporated.

The balance sheet was no longer too small relative to market conditions. Unfortunately, now it was too big. Enter the reverse repurchase agreement, reverse repo.

These work exactly the opposite of a repo. In its simplest form, you lend the Fed cash, and you receive a Treasury bond as collateral. Tomorrow, the Fed gives you back your cash with interest, and you return the collateral to the Fed.

Unlike repos, this immediately raises a question: why on earth would the Fed need a loan? They have a money printer for crying out loud. This is where it helps to understand repos before diving into reverse repos.

Just as repos allow the Fed to inject liquidity and put downward pressure on interest rates (maintain an interest rate ceiling), reverse repos allow the Fed to soak up liquidity and put upward pressure on interest rates (maintain an interest rate floor).

Thus, the reason for the reverse repo facility is not because the Fed is desperate for cash. Rather, the Fed is desperate to get cash out of the financial system and can’t fine tune things quickly enough with open market operations.

Historically, reverse repos stayed at a relatively low level, just like their repo counterparts. However, after the institution of ZIRP and multiple rounds of quantitative easing, the Fed had to start mopping up liquidity constantly to avoid setting off runaway inflation. It turned to the reverse repo facility.

The reasoning behind using reverse repos to absorb liquidity while quantitative easing simultaneously added liquidity was to create money for the Treasury to spend (hence buying Treasury bonds) but prevent that newly created money from multiplying in the banking system.

We’ve covered this mechanism in detail in earlier posts, but the quick and dirty version is that banks can’t lend to the private sector if they’re too busy lending to the Fed through the reverse repo facility.

By absorbing excess liquidity, the Fed maintains an interest rate floor and the volume of reverse repos tells us how hard the Fed is having to work to maintain that floor. By late 2022 and into 2023, the Fed was working overtime.

Reverse repos across the regional reserve banks exceeded $2.5 trillion. That implies the Fed’s balance sheet was roughly that oversized, given the interest rate target range at the time and the relative supply and demand for loanable funds.

So, why did reverse repos drop like a rock after the Spring of 2023? Two reasons.

First, the Fed was selling off its balance sheet and drawing liquidity out of the system with that mechanism, so less liquidity needed to be absorbed by the reverse repo facility. Second, the demand for loanable funds was entering the stratosphere as the federal government continued running multi-trillion-dollar deficits.

That meant the demand for loanable funds was rising while the supply was falling. Going back to Econ 101, that means the price—the interest rate—will rise. With the market interest rate rising, the Fed was no longer struggling to maintain an interest rate floor and reverse repos came back down to earth.

But reverse repos should’ve gone to zero by now, so why haven’t they? They’re still over $500 billion, implying the balance sheet is still significantly oversized, even after the misguided rate cuts of Fall 2024. Here’s what’s going on.

Number one is that most reverse repos aren’t even coming from the U.S. anymore—they’re foreign accounts. Because financial firms and central banks around the world have slightly decreased their use of the dollar as a reserve, those foreign entities are looking for a depository for this extra cash. The reverse repo facility is a perfect fit, especially since it' provides a risk-free rate of return.

The other component is the debt ceiling, which has been in effect since the start of the year. Because the Treasury can do no net borrowing (only roll over maturing debt), the demand for loanable funds has gone way down as Treasury just burns through its cash on hand.

The icing on the cake is that the Fed cut 100 basis points around the November election but is still running off Treasury securities, albeit at an anemic pace, and mortgage-backed securities.

We can interpret the data as follows:

The reduction in demand for loanable funds is temporary. Once the debt ceiling is lifted, the Treasury will borrow between $500 billion and $900 billion immediately, mostly in T-bills, which should completely drain the entirety of the reverse repo facility since T-bills are frequently traded like cash (low liquidity penalty).

After this, the repo facility will kick back into gear as the Fed switches from absorbing to adding liquidity. Possibly in a single day or maybe two, the secured overnight financing rate will swing from the lower bound of the Fed’s target range to the upper bound.

That will make the Fed uncomfortable, and likely prompt one of two reactions.

Option one is to stop the balance sheet runoff, at least for Treasuries, and then resume buying them shortly thereafter.

Option two is to let interest rates rise and maintain the slow pace of the runoff.

So, it’s a choice between higher inflation rates or higher interest rates. Those are our only options. It’s not pretty, but if you know what’s coming you can at least protect yourself financially…

Grab some popcorn and buckle up.

Conspicuously absent from Trump 2.0 is Lighthizer, a man who kept Navarro at bay. The relationship between Trump and Navarro was always a tenuous one because there are so few things on which the two see eye-to-eye. Remember that Navarro was (and arguably still is) a typical liberal California Democrat on most issues. Lighthizer leveraged this and kept Navarro at bay, icing the latter out of most inner circle dialogues.

But now, there’s no Lighthizer and Trump feels a special bond with Navarro now because of how they were both unjustly politically persecuted by a weaponized DoJ. That has given Navarro a level of Oval Office access he never had before. The only thing that can ever peel him away from the White House is the chance to get in front of the cameras, something his ego won’t let him miss.

That brings us to a widely circulated story about Bessent and Lutnick having an impromptu meeting with Trump while Navarro was off doing another interview. Bessent and Lutnick had to explain to Trump that the basis trade was imploding, Treasury markets were on fire, and major trading partners were ready to band together to sink his presidency.

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Each month, the BLS estimates the number of payrolls in the economy and then revises that figure over the next two months. These figures come from a survey of a relatively small number of businesses, but the data are later revised again once a year.

This annual revision process is known as the benchmark and covers a period from March of one year to March of the following year. In the last benchmark, about 600,000 jobs were wiped from the government’s statistical spreadsheets.

That means we never had the number of jobs we thought we did, at least not from March 2023 to March 2024. This is a pattern that has existed for a couple of years now, where initial monthly job reports consistently overestimate the number of jobs.

For the period included in the last annual benchmark, about one in four jobs that was originally thought to have been created never even existed.

But these benchmark revisions don’t simply come out of the blue. The BLS also publishes a quarterly census of employment and wages based on much more comprehensive unemployment insurance data. While this is not nearly as timely as the monthly job reports, it’s much more accurate.

This dataset is slightly different from that used in the monthly job reports, with each excluding certain categories of workers or employment, like government or railroad employees.

Still, the two sets of numbers trend very closely together with relatively small differences between them in most circumstances. That means we can impute from the quarterly census data what kinds of revisions are expected during the benchmark.

And you don’t have to do the math yourself if you don’t want to (we do it because we’re geeks) — you can let the Philly Fed do it for you. Once a quarter, they publish an “early benchmark” which is like a sneak peek on the upcoming BLS data.

The Philly Fed takes state-level data and adjusts the national statistics to develop surprisingly accurate estimates of the upcoming benchmark form BLS, on a quarter-by-quarter basis. Summing the four consecutive quarters (starting with Q2 of the year) in question will estimate the revised change far in advance of its official release.

Of course, the Philly Fed doesn’t release a payroll figure in thousands of jobs the way BLS does. Instead, it presents its findings as a percentage change, at an annualized rate.

That means it takes one more step to convert this seasonally adjusted percent change into the raw change in payrolls. Additionally, because the Philly Fed’s estimated change is an annualized rate only taken to the tenth of a percent, there’s a significant band within the minimum and maximum possible change because of the size of the labor force.

Nevertheless, the numbers from the Philly Fed have been so bad that even a best-case scenario represents a big drop in the next benchmark.

The numbers from the second quarter of last year were terrible, with the Philly Fed estimating payrolls fell 0.1 percent at an annualized rate, compared to the monthly job reports showing an increase of 1.6 percent. So, not only was job growth wildly overestimated for those three months, but net job growth was negative.

This past week, we got the Philly Fed’s estimate for the third quarter, and it was another ugly report. Although not as bad as the second quarter, it again showed job growth being overestimated, this time for the period from July through September.

The monthly job reports for the third quarter showed a 1.0 percent annualized rate of increase, and now Philly Fed’s early benchmark shows just a 0.7 percent increase.

Over the 12-month period ending with the third quarter, the initial monthly job estimates amounted to a 1.3 percent increase, while the sum of the state data showed a 1.5 percent gain. Meanwhile, the Philly Fed’s early benchmark showed only a 0.9 percent increase.

Fractions of a percent may not sound like much, but we’re talking an economy with hundreds of millions of people, which is why you end up with these revisions causing changes of tens of thousands or hundreds of thousands of payrolls.

So, the next benchmark revision is already shaping up to be a real doozy. Between the second and third quarters of last year (the first half of the benchmark’s covered period), the annualized rate of job growth was overestimated by 2.0 percentage points.

Even if the fourth quarter of last year and the first quarter of this year see no significant downward revisions to the Philly Fed’s early benchmark, we’re still looking at a massive drop to payrolls once the BLS releases the official benchmark.

How massive? Almost 1,000,000 jobs.

Once again, the payroll figures are going to prove wildly inaccurate, and we’ll only find out way after the fact. The next benchmark will cover the period from March 2024 to March 2025 (right now) and won’t be released until early 2026.

As we’ve pointed out plenty of times before, problems have been evident in the labor market statistics since the Spring of 2022, and nothing has been done to correct these errors. That’s not to say revisions are abnormal—they’re perfectly normal and standard operating procedure. What’s not normal is very large revisions that all go the same way, in this case, down.

Here’s hoping that the new administration cleans up the mess at BLS and makes some heads roll. Major decision makers from Wall Street to Washington rely on this data and the lack of confidence in the numbers will prove paralyzing if nothing changes.

For now, we just have to take all the BLS numbers with a grain of salt, remembering what the BS in BLS stands for…

The Fed has been running off its balance sheet, reducing its holdings of Treasuries and mortgage-backed securities (MBS) since about April 2022, a process identified by the euphemism “Quantitative Tightening,” or QT.

While this reduces inflationary pressure in the economy, it also reduces demand for Treasuries, making it harder for the government to borrow, at least at low interest rates. However, politicians are fond of a compliant Fed, and QT stops the free money spigot on which big-spending politicians rely.

But the Fed has taken several measures to keep the gravy train coming for politicians. In the summer of last year, it “tapered” QT, meaning it reduced the pace at which it was running down its Treasury holdings. But it continued selling off its agency debt at the previous pace, so MBS kept declining just as before.

That rationale here was that the Fed didn’t want to make Treasury markets feel the pain. Instead, it decided to put the screws to home lending and let the mortgage market bear an increasingly large portion of QT. This is not the only reason for the housing market being frozen over, but it’s certainly not helping.

But we need to understand how the Fed actually reduces its balance sheet. Does it sell the assets on the books, or simply let them mature? It does both, depending on the circumstances.

The Fed is trying to reduce its assets at a specific pace, but the maturity schedule of its holdings doesn’t usually line up perfectly with that monthly tempo. Sometimes more debt matures than necessary, and other times not enough.

When more than enough debt matures, some of the proceeds are rolled over into new debt, resulting in a purchase. When not enough debt matures, additional assets on the balance sheet are sold in the open market.

Why is this important? Because the Fed has $818 billion in unrealized losses, and that’s above and beyond the nearly-$250 billion in realized losses already accrued (mostly from interest payments to financial institutions). Whenever the Fed sells devalued assets, those debt instruments are sold below par, and the Fed realizes a loss.

But note that a loss for the Fed in this instance is effectively adding liquidity to the market, though it’s hidden by an accounting trick.

While the Fed has certain financial regulations that force banks to use mark-to-market accounting on some assets, the Fed (conveniently for itself) uses face value accounting. That means all the Treasury bonds the Fed bought with 2% yields are still counted at par, despite absolutely no one today being willing to pay anywhere near that for those assets.

So, what does this look like in practical terms? Let’s throw some numbers out to illustrate the shady three-card Monty in action.

Imagine the Fed has securities with a face value of $10 million and it sells these on the open market. Because interest rates are much higher now than when the Fed acquired those securities, no one is willing to pay the face value, and the securities sell at a steep discount of $7 million. The Fed records the transaction as reducing the balance sheet by $10 million, but it has only removed $7 million of liquidity from the market, despite having originally added $10 million at the time of purchase.

We’re not back to square one; we’re up $3 million.

Recall that when the Fed sells an asset, you give the Fed money and the Fed hands over a debt instrument, like a Treasury bond. The money you give the Fed simply vanishes; it’s extinguished. Thus, we assume—and rightly so under normal conditions—that reductions in the balance sheet are matched by reductions in liquidity.

But these aren’t normal conditions. Until the last few years, the Fed never pushed rates so low and kept them there for so long, only to raise them so quickly. The violent shifts in monetary policy over the last several years have been truly unprecedented.

Consequently, when the yields for on-the-run securities became a multiple of the yields for off-the-run securities that the Fed was selling, we stopped getting accurate feedback on the effect of QT.

This is a big part of why the reverse repurchase agreement (RRP) facility at the Federal Reserve Bank of New York still hasn’t run dry. Theoretically, the Fed’s balance sheet has shrunk enough to bring liquidity and interest rates back into alignment, but that’s not the case once you realize the Fed hasn’t been sucking out that much liquidity at all, so it’s still working to support an interest rate floor.

(See our previous series of posts on the RRP facility for more on this mechanism and how to interpret volume, rates, etc.)

It turns out that the Fed hasn’t reined in the supply of loanable funds nearly as much as many market participants believe. More supply puts downward pressure on price, which, in this case, is the interest rate. Once again, the Fed has come to the rescue of its political masters.

But remember that price is set by supply AND demand. What we’ve seen over the last several months has been a flatlining of demand, and even a lessening to some extent.

It all has to do with the debt ceiling. Mostly.

Once this limit on government borrowing bit at the start of the year, the ever-growing appetite of the Treasury for borrowing, including for short-term loans like T-bills, was instantly satiated. Since Treasury can now only roll over existing debt, gross issuance is limited to exactly whatever is maturing. Net debt issuance has been zero for a couple of months now.

Since the RRP facility is a respite for cash and not a way to lock up liquidity for any appreciable length of time (we’re talking overnight loans here), it’s impacted much more by Treasury bills than notes or bonds. T-bills have a maximum maturity of 52 weeks with the shortest term being only a few weeks’ duration.

As former Treasury Secretary Yellen shifted Treasury issuance into a heavy reliance on T-bills to manipulate the yield curve, RRP volumes collapsed, falling from $2.5 trillion to near zero. But with Treasury up against the debt ceiling, that trend has ended.

In fact, it’s starting to reverse because the new Secretary, Bessent, is normalizing the Treasury’s maturation schedule, meaning he’s restoring the regular mix of T-bills, T-notes, and T-bonds.

As old debt matures today and is rolled over into new debt (remember this is just gross issuance since net issuance is still zero), Bessent is replacing some T-bills with longer-dated debt instruments. This is creating a net reduction in T-bills outstanding.

So, demand has decreased at the same time supply has increased, or at least supply is decreasing much slower than previously believed. Even with a 100-basis-point drop in the Fed’s target interest rate, the RRP facility still hasn’t completely drained, and the standing repo facility is, well, just standing there, doing nothing.

The effect here is hardly benign. Each month since the Fed began cutting interest rates has seen annual inflation rates ticking higher. Even if this second Trump administration can drastically cut government spending and balance the federal budget in short order, there is still a tremendous amount of inflation already baked into this cake.

Furthermore, these manipulations by the Fed, whether active maneuvers like paying interest on reserve balances and RRP operations, or passive ploys like accounting tricks, each starve the private market of capital to one degree or another, while providing money for the government to spend.

Wall Street, of course, still gets paid. The Fed is shelling out $473 million per day in interest payments to major financial firms, but the interest rates on your credit cards are at a record high, while car loans and mortgages are prohibitively expensive for many families.

This means we’re not out of the woods on inflation—not by a long shot. We were never trending toward the Fed’s 2.0% target, and now you know why.

Powell & Co. never had any intention of getting us there…

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Many Americans are struggling to get through this Christmas season because of inflation and the dramatically higher cost of living. That kind of pressure can tempt us to think the economics of Christmas center around the price of gifts and the costs of entertaining. Those things are important, but it is not where Christians should be focused on Christmas morning. Instead, we should think about Christ’s role of redeemer—a fundamentally economic term.

The word “redeem” can take several connotations, each with subtle distinctions, but they are all rooted in an idea of exchange. One thing is exchanged for another, at a cost. When you redeem a coupon, for instance, you must sacrifice it to receive some discount or other benefit.

The coupon’s value is not realized until it is given up or sacrificed. Just like in the case of a share of stock that has appreciated in price, the owner of that stock does not “realize” the gain until the stock is sold. Only then can he or she receive any money from the sale. Before that, any increase in the stock’s price is called an “unrealized” gain.

If Christ is our redeemer, then something had to have been exchanged, or sacrificed. It was Christ himself who filled that void, becoming not just the high priest who offered a sacrifice, but the sacrifice itself.

Even before he was crucified, Christ’s incarnation was a sacrifice. He humbled himself to share in our humanity that we might share in his divinity. And he was not born in a luxurious palace, but a barn, because his entire life on earth, from beginning to end, was a sacrifice.

His humble birthplace bore evidence to the fact that Christ came not to be comfortable but to die. There are few better illustrations of this than the second verse of the Christmas carol “What Child Is This?,” which is worth quoting in full:

Why lies he in such mean estate, Where ox and ass are feeding?

Good Christians fear for sinners here, The silent Word is pleading.

Nails, spear shall pierce him through, The cross be borne for me, for you.

Hail, hail, the Word made flesh, The babe, the son of Mary.

God so loved humanity than he paid the ultimate price—his only son, his own self—to redeem us from our own fallen nature. But that sacrifice tells us just as much about humanity as it does the infiniteness of God’s love.

Everything is worth what its purchaser will pay for it, and God purchased our redemption with his own life—something incomprehensibly beyond measure. The value we should place on human life, therefore, should be equally beyond measure. Anything less is to devalue human life and indirectly reject God’s gift. By his life, death, and resurrection, Christ implicitly told the world that the human soul was worth a divine sacrifice, and nothing could be more valuable than that.

We remember this great gift of God’s when we share the wonderful tradition of giving presents at Christmastime. In doing so, we sacrifice our own earnings and wealth so that we might give to others. And while these small acts of redemption appear entirely material in nature, there is a deeper reality at play, especially at Christmas.

A present for someone else tells that person that he or she means more to you than whatever you sacrificed in order to give them that gift—just like when the Redeemer told us our salvation meant more to him than his own life.

May God bless you this Christmas.

This piece originally appeared in the Daily Caller on December 25, 2022 and is reproduced here with the author’s permission.

And it really was a repudiation of the Biden-Harris agenda with Trump winning every single swing state and picking up ground in all 50 states compared to 2020. And it wasn’t just Main Street that voiced support for Trump—Wall Street did too.

Earlier this year, in a leaked letter to his investors, Scott Bessent (the next Treasury Secretary) observed that markets were rallying 10x when Trump led in the polls compared to when Biden led. (This was before he dropped from the race and endorsed Harris.) Bessent said that Trump would be better for business, better for return on investment, and better for earnings. “All pullbacks this year should be bought,” he urged.

The day after Trump won the election, the Dow Jones Industrial Average exploded by 1,300 points, indicating Bessent was right.

But the gains are not evenly distributed across all sectors nor throughout the entire S&P 500. That’s because the Trump agenda is not going to benefit every business equally. As with any administration, there will be some winners and some losers. Here’s what we’re thinking about where the economy and markets are heading.

First off, many things are likely going to get worse before they get better. Elon Musk gave the same ominous warning in a recent interview. The Treasury and Federal Reserve have been holding together the financial system, especially Treasury markets, with bubblegum and bailing wire. And things are starting to unravel.

Yellen and Powell effectively kept a lid on tremendous inflationary pressures in the economy over the last four years through extraordinary measures. Believe it or not, inflation would’ve been much worse without these maneuvers. The problem is that they’re all only temporary fixes—Band-Aids, really—and the inflation isn’t done.

There is still about $2 trillion that has to work its way through the banking system, and that will further grow the money supply. (M2 has been on the upswing for months.) Growth of the federal deficit also isn’t slowing down. Banks are still sitting on hundreds of billions of dollars in unrealized losses and, perhaps most worryingly, the repo market is likely going to require a massive liquidity infusion from the Fed in the near future—like the Fall of 2019, but on steroids.

In many ways, the next president is being handed a ticking time bomb. Well, more like several ticking time bombs, all of which should go off sometime in the next year.

This means that even with pro-growth policies, the economy and markets are still facing significant headwinds. Furthermore, the once and future president has made it clear that he intends to buoy certain flagging industries while taking a sledgehammer to others. So, how to determine which is which?

Let’s start with energy. While the incoming Trump admin intends to go all-in on domestic production, it’ll be the small producers and start-ups that see the fastest growth rates. Believe it or not, several big energy companies actually supported Biden admin regulations that hampered production because those changes put many small producers out of business—this is why rig count has been falling. Their market share was promptly snapped up by the biggest oil and gas companies in the industry.

So, expect ExxonMobil to do well, but don’t overlook the fledgling firms that are going to have red-letter years very soon. Lots of wells have been shut down, even as other wells ramped up production, over the last four years because regulations made those wells unprofitable except at $100+/bbl. Deregulating will return profitability to $40/bbl for many wells.

Financials are likely the opposite of energy—there’s much more pain in store for the little guy and bailouts for the big players. We still don’t want to touch commercial real estate with a 39-and-a-half-foot pole, and that asset class is mostly financed by regional banks. While large banks’ balance sheets are only about 7 percent CRE, it’s almost a third of small banks’ balance sheets.

And although there are some big players (Bank of America is likely one of them) with massive unrealized losses on their balance sheets, the Fed under Powell will almost certainly jump in and bail out their friends. Small banks, on the other hand, have no friends at the Fed—some of them aren’t even in the Federal Reserve System.

Then there’s manufacturing, where we expect to see broad-based improvements. Everything from legacy to venture capital is fair game here, which is why we like diversifying within the sector and dollar cost averaging as a way to hedge this investment.

The thinking here is that more deregulation and an advantageous tax environment is coming. That includes both reforming the domestic tax code and new tariffs. (Trump is already threatening massive new tariffs on Canada, Mexico, and China on day one.) Manufacturing is a sector that has been hit particularly hard by regulation, with manufacturers paying around $50,000 per worker in annual regulatory costs today—and that’s on top of what’s known as “costs of compensation,” meaning wages and benefits. Throw in the thinning margins from inflation driving up costs and the sector has been in recession for a while, hemorrhaging jobs.

A lot of those job declines haven’t hit the books yet, which is skewing analysts’ perspective, but the previously announced revisions will be incorporated with January’s data release. When those numbers hit the tape, it’ll likely create buying opportunities, which will benefit those following the dollar-cost-averaging strategy.

Changing gears, Real Estate Investment Trusts are still good buys, but only for certain locations. Do you due diligence before plowing money into REITs that are heavily invested in overbought markets. Miami is one such metropolitan area—although it’s been on an absolute tear for several years now, it’s at risk of a pullback or at least stagnating.

One thing that’s not overbought is gold. It’s difficult to overstate how much inflationary pressure is built into this economy. Regardless of who is president or Treasury Sec. next year, we’ll still be dealing with the fallout of Yellen and Powell screwing around with financial markets in order to finance massive budget deficits.

The recent decline in gold is largely due to investors’ false perception of inflation cooling combined with anticipation of Bessent’s better management of Treasury issuance. Unfortunately, inflation isn’t dead—not by a long shot. We can expect the dollar to continue falling against gold, even if it rises against other currencies, which is the current trend. Don’t confuse “dollar strength” as measure against the pound, yen, or peso with actual purchasing power as measure by the price of gold.

Gold is an especially great play right now because of the quiet talks within the Trump inner circle about 50-year T-bonds with what is essentially a gold call option.

The government needs to refinance $7 trillion of debt next year, and a good chunk of that is T-bills that need to be shifted to longer-term securities, including bonds. But investors have been burned—badly—over the last 4 years from inflation. Between the rapid change in both inflation rates and interest rates, bonds have had their worst 3-and-a-half-year run in at least a century. That puts Bessent in a tough spot.

He needs to stretch out debt repayment over a long time horizon, but investors will demand much higher yields to assume the kind of risk associated with a 50-year T-bond. One way for the Treasury to have its cake and eat it too would be to provide inflation protection on those securities. But investors don’t have the appetite for TIPS and I-bonds like they used to. Enter the 50-year gold-option bond.

In her recent book, Good As Gold: How to Unleash the Power of Sound Money, Judy Shelton outlines how these bonds work. Upon maturity, bond holders have the option to take payment in either dollars or a specified weight of gold. That means the government can’t inflate away the value of the debt. This in turn gives investors confidence that they don’t have to worry about inflation since they have the ultimate inflation protection. Consequently, they’ll be willing to accept a lower nominal yield, reducing the cost of servicing the debt in next year’s budget.

There is an important spillover effect to consider. Investors will have increased confidence in not only bonds but notes and bills too. This will help push down yields across the entire yield curve, even though the regular-issue bills, notes, and bonds don’t have the same protection that the 50-year T-bonds do.

In addition to keeping a close eye on gold, we’ve also been tracking all of the regional Fed surveys, which are showing a massive surge in optimism and future business conditions, especially for manufacturing but the service sector too. Consumers and businesses alike are much more upbeat about what the future holds. It would be wise to consider slowly shifting from consumer defensive to consumer discretionary in the year ahead. The same goes for rebalancing the portfolio to include less healthcare and more tech along with basic materials. Just be careful not to do it too early as there are still troubled waters ahead before we enter the promised land of a new American Golden Age.

And there really are some troubled waters ahead—that’s not hyperbole. It isn’t all sunshine and rainbows for the economy broadly nor financial markets specifically. We’ve already highlighted how the Fed is running into problems as it tries to unwind its monetary manipulations, and things are going downhill fast with a repo crisis looming.

Bessent and Trump are going to have a helluva time trying to undo the sabotage from Yellen while limiting the collateral damage—but that’s a subject for the next post. For now, let’s show our gratitude this Thanksgiving and hopefully spend it with the ones we love.

Let’s start with the Fed’s recent “emergency-sized” rate cut of 50bps. There was no macroeconomic justification for it, even from the standpoint of the flawed Keynesians models that the clowns at the Fed love to use.

Inflation remains above the 2.0% target and the monthly increases in core price indexes indicate we’re not trending to an annual rate of 2.0% yet. Likewise, the official labor market data don’t show a need to bring down rates either, according to the Keynesian thinking.

That just leaves two options, which are not mutually exclusive—note that both of the following can be true. Powell & Co. are playing politics and conducting election interference, and/or the financial system is being held together with bubble gum and bailing wire.

And note that option one is not unique to today; the Fed has a long history of being political because its masters are politicians—people in Congress and the President. If the Fed steps too far out of line, the politicians will clean house at the central bank.

On the second point, there are clean signs of distress in the financial system. Now, you won’t see any when looking at financial stress or the financial conditions index (both of which show levels today that are below historic norms), but the signs are there, nonetheless.

Exhibit A: secured overnight financing. After the Fed did their jumbo rate cut, the secured overnight financing rate ended up spiking, erasing nearly one-half of the cut in just two days’ time. Was this a spike in demand or a drop in supply? The huge surge in volume to over $2.5 trillion for the first time ever indicates it’s the former. The upward trend here matches the increased borrowing needs of an ever-hungrier Treasury.

Simultaneously, the continued decline in RRPs (again, refresher available here) indicates that the Fed is allowing money to return to circulation and, more importantly, to return to the loanable funds market.

This is countering the Fed’s balance sheet reduction, which has slowed significantly since the Summer when they reduced the rate of Treasuries run off, even while keeping the MBS run off the same. (To Hell with mortgage rates, just keep the yields on Treasuries low!)

So, we’re really not looking at a supply crunch here. Supply has actually been increasing later—just check out M2. Conversely, demand is surging.

And there’s simply not enough loanable funds to meet that demand. We are in a shockingly similar position to where we were almost exactly five years ago, when the Fed’s overzealous tightening spawned a repo crisis and the central bank—which ostensibly sets interest rates—temporarily lost control of interest rates.

Fast forward to today, and the standing repo facility has been tapped in an attempt to keep interest rates within the Fed’s target range without a line forming at the discount window.

It’s now clear that bank reserves are in a downward trend and have been for some time. These trends have been difficult to establish in a post-pandemic world because of the repeatedly large swings induced by the Fed’s almost weekly manipulations, but now there’s no doubt we’ve been on the way down since about mid-March.

No coincidence, that’s also when banks could no longer borrow from the BTFP. What we’re observing right now is essentially the financial plumbing running dry. The Fed is barely holding everything together, with no cooperation from the Treasury. Liquidity is being sucked from reserves to buy Treasuries as money market mutual funds explode higher from this transfer.

And while $1.5 trillion served as a relatively stable level for reserves as 2020 dawned, it’s no longer anywhere near sufficient today. The lowest comfortable level of reserves (LCLOR) is now higher—much higher.

Circling back to the demand-supply imbalance, the Fed is trying to decrease supply to strangle inflation, but the Treasury is jacking up demand. So much so that today’s interest rates make absolutely no sense, and we believe we’re heading to another repo crisis. Why? Because the demand surge is about to go into overdrive—just look at the latest quarterly refunding data from Treasury.

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Yields on Treasuries went up, not down. Same thing with the average rate on credit cards. And mortgages. It’s the opposite of what you’d expect.

But the Alice-in-Wonderland feelings don’t stop there.

Equities and fixed income are supposed to move in opposite directions. They’re not. Instead, both are rising, with a rally in stocks and bonds happening at the same time.

Oh, and don’t forget the housing market. We detailed in a previous post how home prices and interest rates became decoupled in the last couple years, creating this phenomenon where home prices went up as interest rates went up—normally, they move in opposite directions. We also explained that they were recoupling.

As interest rates on mortgages declined over the last several months, it didn’t bring down home prices as many had hoped. Instead, it led to another rally, sending home prices to new record highs. Are those higher home prices resulting in the anticipated increase in supply? Nope.

And what about manufacturing? The sector is still mired in recession and has been for two years. There is still a steady stream of layoffs and although the employment losses aren’t catastrophically large, they add up to more than 140,000 since January 2023. So why are investment managers suddenly so bullish on manufacturers?

Honestly, why be bullish in general? Many of the earnings beats that we’ve been seeing are really misses based on original forecasts. The “beats” were essentially created by published new forecasts with huge downward revisions.

That mirrors, in many ways, the revised economic data we’ve been getting from the government bean counters. It’s a great number at first—beating expectations—but then it’s revised down, and no one bothers to notice that the final revision is actually a miss from the original Wall Street consensus.

Instead of 11 job estimate beats in 12 months, the Bureau of Labor Statistics really delivered 7 misses for nonfarm payrolls.

Conversely, when things like gross domestic income were revised up recently, it wasn’t done because of better data, but simply a tweak to the models at the Bureau of Economic Analysis, resulting in hundreds of billions of dollars in savings appearing out of thin air.

And that’s despite Americans saying in poll after poll that they have no savings left. Their bank accounts have run dry, and their credit card balances have ballooned. Last week’s post dealt with some of the reasons why our official economic data is turning into junk, but that doesn’t explain the mysterious market pricing we’ve been seeing.

We return to the question of why equities and fixed income are both rallying. Let’s say the official government data were showing absolutely no growth and very high rates of inflation; we should then see that reflected in the market. Or, if no one believed the official data anymore, we should see that reflected too. What makes current market moves so confusing is that equities and fixed income seem to be reacting to different data entirely.

Furthermore, markets have reacted in a nearly identical way to projections of seven rate cuts as they did to projections of just one cut. To Wall Street, a cumulative reduction of rates by 350 basis points seemed indistinguishable from a reduction of 50.

For a while there, it was pretty clear that good news was bad news, and bad news was good news. In other words, any data pointing to sour economic growth—like a lousy jobs report—was supposed to be the green light for the Keynesians at the Fed to cut rates hard and fast. Conversely, strong jobs numbers were supposedly the Keynesians’ red flag indicating more inflation and rate hikes to compensate.

Regardless of how flawed this thinking was, what followed was a predictable market reaction. The prospect of rate cuts made people anticipate cheaper borrowing costs. That sent equities soaring and drove down yields on fixed income, like bonds.

Fast forward to today, and even this formerly rock-solid relationship has broken down. Analysts find themselves at a loss regarding how to square the circle of these inexplicable market moves.

It seems there are only two explanations that fit the equity and fixed income data, and only one of those theories also aligns with movements in the barbaric metal.

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But that’s becoming increasingly hard these days with unreliable economic data. If the figures in the National Accounts aren’t accurate, then being data dependent does you no good. It’s garbage in, garbage out.

That brings us to two recent revelations in the economic data, one “official” and the other proprietary.

On the official side, we have the recent benchmarking of gross domestic product (GDP) and gross domestic income (GDI). We’ve detailed before how the growing disparity between these two meant they’d have to converge either in revisions or with new data showing one increasing with the other decreasing. Furthermore, the lower GDI figure was likely much more accurate than the inflated GDP numbers. So, instead of GDI catching up, GDP was supposed to catch down.

But it didn’t. Instead, real (inflation-adjusted) GDP was revised up a shocking $300 billion (chained 2017 dollars) and real GDI exploded higher by $850 billion.

But where on earth did the Bureau of Economic Analysis magically find hundreds of billions of dollars in additional income? It wasn’t because they found new data that supported this conclusion. Instead, they found an excuse that got them to the conclusion they wanted.

The BEA essentially changed some of their models in order to fabricate hundreds of billions of dollars in additional savings. Thus, without any evidence to support these figures, the BEA made assumptions that gave them the outcome their political bosses in the White House wanted—the BEA is, after all, part of the executive branch.

It’s difficult to overstate how damaging these kinds of political moves are when they come from agencies upon which we rely for nonpolitical information. It’s one thing when the White House spokesman spins things (both parties do that) but it’s highly problematic when party apparatchiks distort the National Accounts.

Major decision makers, from Wall Street, to Congress, to the Federal Reserve, all rely on official government data. And it’s completely unreliable today.

To be fair, that lack of accuracy is not entirely nefarious. In the post-pandemic economy, some big holes have revealed themselves in the modeling work of government bean counters. The scandal here is not so much that these government employees are bad at their job (the DMV is emblematic of government efficiency), but that the problems have been evident since the Spring of 2022 and nothing has been done to address these issues.

Speaking of government employees, we also have to lay some of the blame on market participants who don’t bother reading newsletters like ours, and so don’t understand the products being produced by the government. The latest unemployment situation showed this in spades. People cheered the unemployment rate falling to 4.1% but it wasn’t because of private sector growth. It was because of government employees.

Almost 800,000 people in September started working for the government. If there hadn’t been that massive surge in government hiring, the unemployment rate wouldn’t have fallen to 4.1% but risen to 4.5%.

That’s a case of data being widely available and folks just not knowing where to look, or even what to look for.

But now we have to address the second recent revelation in the economics data—a study from the Brownstone Institute. The two authors (both economists) reevaluated the accuracy (inaccuracy?) of inflation metrics today and produced alternatives that better reflect real world data on price increases over the last five years. They then used these revised inflation figures to adjust GDP into real terms.

The authors identified three ways in which inflation metrics today are garbage-in-garbage-out. First, housing costs are imputed from rents and the price indices don’t even look at home prices or interest rates—a running complaint of ours, as long-time readers know. This has grossly understated housing price inflation since 2019.

Second, government bean counters often overstate the benefits of regulatory action in order to push through their ideologically driven executive branch overreach. That’s how we end up with dishwashers that don’t wash dishes and clothes washers that don’t wash clothes. Consumers regularly complain that these appliances need to be run twice in order to actually clean dishes and clothing.

And although the appliances are more expensive and the quality has declined, the statisticians count this as a win and often reduce the item’s price within a price index like the CPI or PCE chain-type price index.

Third, indirect purchases, like health insurances are notoriously hard to measure and rapidly changing economic conditions make this even more difficult. The authors dusted off an older methodology that seems to perform better in periods of faster inflation, like today, to once again provide more accurate results.

And those results are rather shocking.

It turns out the economy shrunk much more than previously estimated in 2022 and has never really recovered. We’re even below where we were at the start of 2019. So much of what we thought was economic activity has really just been inflation, according to this study.

If that seems unbelievable, consider that a majority of Americans believe we’re in recession, and that’s been the case for well over a year now. Maybe people feel terrible about the economy because it IS terrible.

That’s painfully evident when you look at the study’s estimates for disposable personal income, after adjusting for inflation using the author’s modified deflator. People simply have less purchasing power today than they did five years ago—no wonder everyone is hating on this economy.

It’s just another case of garbage in, garbage out. With so much unreliable data out there, you may be tempted to stick your head in the sand and say the heck with it all, but that’s throwing the baby out with the bathwater. It’s a lot of work to sift through the nonsense and figure out what makes sense, but it’s the only way to not fly blind today.

And sure, you don’t have time to comb through the barrage of public and proprietary data being released every day, but that’s why you have us. We’re here to find the kernels of truth in a sea of garbage—for the truth will be your life raft in economic storms. Cling to it and live; cling to the garbage and drown.

While our readers already knew that annual interest on the debt was heading to $1 trillion, this was the first time it had ever been recorded. As of August, the 11th month of the fiscal year, the government has spent over $1.049 trillion just to service the $35.3 trillion debt. What makes it scarier is that we still have another month to go in the current fiscal year.

It didn’t even take all 12 months to prove wrong those folks saying interest on the debt wouldn’t break the $1-trillion threshold.

Even with interest rate cuts, there’s no significant evidence that the problem is slowing down. That’s because interest on the debt is a function of BOTH the average interest rate on securities AND the total debt outstanding. Well, the latter is exploding.

We’ll add about another $1 trillion to the federal debt before the end of the calendar year, and then likely continue adding about $1 trillion every 100 days or so form there on out.

This was also the worst deficit for the month of August ever—including the blowout spending years of 2020 and 2021 when Congress pushed through all kinds of bloated pork. In fact, at $380 billion, it’s larger than any other monthly deficit of fiscal years 2024 or 2023.

And this isn’t a revenue problem—it’s a spending problem. Despite concerns of a recession, tax revenue has actually held up, so the burgeoning deficit is clearly coming from the other side of the ledger.

In the first 11 months of the current fiscal year, the federal government took in almost as much revenue as in the entire prior fiscal year. If we look at the comparable period (first 11 months of both FY’s) then we see revenues have increased from $4.0 trillion to $4.4 trillion. Spending, however, has increased even faster.

This past August, federal outlays were $687 billion, compared to $194 billion in August 2023 — more than tripling in just one year. Outlays in the comparable period between both years have gone from $5.5 trillion (2023) to $6.3 trillion (2024).

Clearly, the ballooning deficit is a spending problem. And what a problem it is.

We were very critical of Treasury’s overly optimistic projections on the current fiscal year’s deficit and, sure enough, we were right. The deficit has already blown past the projection for the fiscal year and—as we’ve already said—there’s still another month to go.

The $1.9-trillion deficit will break the $2-trillion threshold with ease once September is in the books.

And there’s no reason to believe multi-trillion-dollar deficits are going away anytime soon because the runaway spending continues. In fact, mandatory spending and interest on the debt together will exceed government revenue for the foreseeable future. So, literally all discretionary spending will be deficit spending.

The monthly Treasury statement for August bears witness to this sad situation: 55 cents of every dollar the federal government spent last month was borrowed. Spending was more than twice all government receipts.

While the profligate spending out of Washington, DC has certainly exploded over the last four years, the interest on the debt is now also a major contributor to the deficit. The increase in the trend of discretionary spending is now less than the increase in the trend of interest on the debt.

In other words, depending on how you want to measure it, interest on the debt is now the largest contributor to the deficit.

For the fiscal year to date, interest on the debt is the third largest line item in the Treasury’s August statement, behind only the Social Security Administration and the Department of Health and Human Services, both of which have increased relative to their pre-2020 projections, but by much less than interest on the debt.

Federal finance is clearly in shambles, but where do we go from here? Are we actually already in the fiscal doom loop? Well, yes and no—it’s complicated.

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Month after month, they released blockbuster jobs reports, only to have the numbers revised down in subsequent releases.

The problem has become so persistent that members of Congress are wondering if something nefarious is going on behind the scenes.

The latest data show that initial estimates of job growth for the year ending in March 2024 were grossly overestimated by 1.2 million — a third of all supposed job growth.

Senate Republicans have had enough of these phony numbers and are demanding answers.

While there’s not yet a smoking gun, some suspect government statisticians are committing lies of omission.

The Labor Department released its preliminary annual benchmark last week, something that’s normally done each year as better data becomes available in the labor market.

As part of normal operating procedure, these figures are used to adjust monthly jobs numbers.

But what makes this year’s benchmark so abnormal is the size of the downward revision: At 818,000, it’s the largest since 2009, when the labor market was bottoming out in the depths of the Great Recession.

At that time, economic conditions were deteriorating so quickly that the Labor Department’s statistical models were no longer producing accurate results.

Assumptions that made perfect sense in 2005 ended up producing erroneous results in 2009 — garbage in, garbage out.

The same problem seems to be happening today, and it’s been going on since the spring of 2022.

Again, the problem here is not simply that economic data are being revised; that’s routine.

Rather, the alarm bells should be ringing because the jobs numbers are being so consistently revised down by such large amounts.

This new benchmark data is bad enough with a drop of over 800,000 jobs — but the situation is even worse when you realize that it comes atop the existing downward revisions to the monthly jobs reports.

Soup to nuts, the total overestimation of job growth was 1.2 million in a 12-month period.

Wiping out a third of all job growth over the course of a year is the equivalent of losing four entire months on the calendar.

Even more frustrating is that this was no surprise to those paying attention to the labor market.

In the manufacturing sector, for example, countless private data have been pointing to job losses for over a year, even as the Labor Department has been logging job gains.

It turns out that the sector has in fact been losing jobs, down over 100,000 since the beginning of 2023.

Much of the problem with the wild overestimation of job growth stems from the “birth-death model” the Labor Department uses to estimate employment data.

This statistical model tries to account for firms that are being created and firms that are going out of business month by month — and it’s laughably off the mark.

In brief, the birth-death model has been wildly overestimating the number of firms in the American economy, assuming nonexistent businesses and the jobs that go along with them.

Before the COVID pandemic, the economy supported a robust creation of both firms and jobs, but under current conditions this is no longer true.

The statistical assumptions that made sense in 2019 are worthless today.

But even the robust business creation the Labor Department logged immediately after the COVID lockdowns ended was not representative of reality.

It turns out that was a mirage, associated with widespread fraud as swindlers “created” businesses to get government handouts — but those firms never actually employed people.

By assuming artificially robust business creation today — not reflective of actual economic conditions — the birth-death model is still habitually overestimating job growth.

And the problem remains unaddressed: Year to date, it accounts for 908,000 jobs added in the non-seasonally adjusted data.

Over the last 12 months, the model “added” 1.3 million jobs — more than half of the 2.5 million new jobs the Labor Department has claimed.

To be clear, some of the jobs gains imputed from the birth-death model are indeed real, but most of them are likely a statistical error.

Decision-makers from Wall Street to Congress to the Federal Reserve rely on this data to make weighty calls, so it’s imperative that the numbers be as accurate as possible.

The Labor Department owes Congress, and the American people, a full explanation of what’s wrong with its models and methodologies — as well as why nothing has been done to fix their obvious problems.

The text of this article has been reposted here with the author’s permission.

Now, where are we going from here? Not just gold—what about other inflation hedges? Buckle up as we reevaluate if the end-of-year forecast still makes sense given all the volatility we’ve seen over the last 4 months.

First on the docket is a look at various forms of liquidity and Treasuries. We’ve been very critical of Yellen’s manipulation of the yield curve via overreliance on T-bills, including how this is costing taxpayers an extra $100 billion annually in additional interest on the federal debt.

But we have to remember that not all Treasuries are created equal. Or, at least they have different liquidity premiums. People are much more willing to treat T-bills like cash than they are with T-bonds.

What Yellen has done is flood the market with a near cash substitute. Now to be clear, your bank isn’t going to hand you a T-bill when you try to withdraw money from your checking account, but it’s darn close to that behind the scenes, and anywhere else the cash doesn’t need to be visible.

It’s been the Treasury’s version of Quantitative Easing, increasing liquidity by roughly the equivalent of $1 trillion in cash. And the buyback schedule is only adding to the effect from the new maturity schedule. They’ve managed to offset the Fed’s tightening—it is an election year, after all.

At the same time, Powell & Co. are getting ready to cut rates, which will cause the reverse repurchase agreement facility to effective collapse to or near zero. RRPs going away is not the catastrophe some people think. Alarmists for the most part are scared because they don’t understand how this complicated mechanism works.

You can get more details on RRPs from our previous posts (like this one) but suffice to say this facility soaks up excess liquidity to maintain a floor on interest rates. But dropping the interest rate means the old floor no longer has to be maintained.

That’ll dump about $300 billion of base money into the economy. And then there’s bank reserves. Once the Fed drops the target for the fed funds rate, it has to drop this interest rate too, and banks will pull over $700 billion from the Fed’s electronic vaults.

Even with continued asset sales (quantitative tightening), the Fed will still dump over $1 trillion into the economy if it cuts just 25bps.

And then there’s the deficit. We know, we know—we’ve beaten this dead horse a lot. Nevertheless, we have to reiterate that this is adding to inflationary pressure and driving price increases, including the bubble in financial assets.

At the same time, inflation has slowed significantly since April. We’re not so concerned about annual rates here as annualized rates: the month-over-month increase in prices has declined dramatically.

This is chiefly attributable to the plunge in demand across the economy. More and more indicators point to recession, as we explained here.

The question then becomes how much the Fed and Treasury will essentially pick up the slack via cash infusions. That will reinflate asset bubbles, à la the Japanese Yen carry trade, and put additional upward pressure on gold prices.

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